Ethical investing is all about aligning your personal beliefs with your investment portfolio. There has been a growing consumer demand for ethical investing. According to Responsible Investment Association Australasia, 4 in 5 Australians would consider switching their super or other investments to another provider if their current fund engaged in activities inconsistent with their values.
If you are concerned about investing your dollars supporting industries you do not agree with, ethical investing may be just what you’ve been looking for.
What is ethical investing?
Ethical investing has many variations, and the specific definition is likely to vary from person to person. Broadly, themes include sustainable investing, socially responsible investing, green investing, impact investing and ESG (environmental, social and governance) investing. Most of these trends toward the same idea: creating positive change by thoughtfully and intentionally investing your money.
Traditionally investing is based around the notion of identifying companies that have solid financial return. Solid financial returns are a good thing, but these returns may well be achieved through exposure (intended or not) to fossil fuels, weapons, animal cruelty, tobacco, and gambling; industries some may not feel comfortable supporting.
Over the last decade, there has been a trend towards a more socially focused investment approach. More investors are looking to invest ethically by identifying companies that exhibit both good financial performance and align with sustainable goals.
However, what is ‘ethical’ depends on the individual. What is ethical to you, may not be to someone else. That is why it’s important to look behind the curtain of ethical investments and make sure they align with the impact you’d like to have.
ESG (environmental, social and governance)
For example, if an investor is going to invest in an oil company, an ESG approach will help determine if the oil company has a superior environmental performance and treats its employees well.
The social component consists of people-related elements like company culture and issues that impact employees, customers, consumers, and suppliers – both within the company and in greater society. Accenture is a good example of a company that meets the social criteria for ESG. Accenture has an admirable workplace approach, earning a spot-on the Fortune’s list of Best Companies to Work For, for 11 years. Accenture pays close attention to its diversity and inclusion in its workforce. The company plans to improve its workplace gender ratios, with a goal to have 50% female and 50% male employees by the end of 2025.
Back in the 90s, Nike had consumers protesting outside Nike stores, and news stories were casting Nike as villain in child labour and sweatshop allegations. In 2005, Nike was the first company within its industry to demonstrate transparency (for its contract factories) publishing their first Corporate Social Responsibility (CSR) report. The CSR report detailed pay scales and working conditions in its factories and admitted continuing problems. Nike has come a long way from 90s, by acknowledging its issues, demonstrating transparency and working toward change. And today the company is counted among CSR leaders.
The governance component relates to the board of directors and company oversight, as well as shareholder-friendly versus management-centric attitude. ESG investors analyse how corporate managements and boards relate to different stakeholders, how the business is run, and whether the corporate incentives align with the business’s success. Intuit is a good example of a company that meets the governance criteria for ESG. Intuit satisfies many of the attributes in the corporate governance category where they have a 40% diverse board.
Ethical investing approaches
This is the simplest, and most traditional method. It involves screening out industries, or individual companies so that the investors have no stake in them i.e. Guns manufacturers, gambling products, weapon manufacturing, nuclear power producers or companies that use child labour.
Oracle’s Ethical Diversified Portfolio uses a negative screening third party tool to help identify companies and industries that many consider unethical and we exclude these from our portfolio. Some of the industries screened as unethical are adult entertainment, firearms, oil and gas, gambling, cannabis, pesticides, and thermal coal.
Oracle’s Ethical Diversified Portfolio uses a positive screening third party tool to help identify companies and industries as ethical and sustainable and Oracle seek to promote them within the investment portfolio. The industries we have identified as ethical are affordable housing, education, energy efficiency, financial inclusion, green buildings, green transport, health, pollution prevention and reduction, renewable energy, resource efficiency, sustainable agriculture, and food.
Impact investing and community impact
Socially Responsible Investing (SRI)
How do ethical investments perform?
Generally, companies that treat their employees well and are thoughtful about their environmental impact may also be better run and less prone to scandal. Which can result in a material benefit. For example, companies that adhere to ESG concerns may avoid fines and lawsuits for issues such as mismanagement of toxic waste disposal, sexual assault and harassment charges and fraudulent transactions, since they may have policies to help avoid those issues in the first place.
Is ethical investing right for you?
Take some time to outline what an ethical investment looks like to you.
Does an oil company still count as “ethical” to you if it has robust environmental initiatives, or would you rule out investments in oil entirely?
Knowing what industries, you want to support and which you want to avoid will make it easier to include or exclude certain investments.
We hope we have helped you better understand ethical investing and perhaps attracted you to being a socially responsible investor. You may want your portfolio to be socially responsible and outperform the broader market. If so, ethical investing could be a great match for you.
Want to learn more about Oracle Ethical Diversified Portfolio?
Why not visit our ethical portfolio page to learn more?
For further information on our Ethical portfolio, why not have a discussion today with a Oracle professional financial advisor?
We can help you find ethical investments that suit your individual values and morals.