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Is ethical investing right for you?

Nov 11, 2020

Is ethical investing right for you?
At present, people around the world are increasingly aware of how their consumption choices are impacting on issues such as slavery, animal welfare and climate change. You may not be aware, but in the world of investing, you can also choose to invest your money into ‘ethical and responsible’ investment options.

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 is investing according to your morals, ethics, and values. Investing ethically in companies that demonstrate a positive environmental and social impact.

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)

ESG approach analyses a potential investment and consider different Environmental, Social and Governance (ESG) factors. Investors use this information to inform selection of companies and the ‘weight’ (amount owned) of a particular company in a portfolio, as well as how they engage with a company, they are invested in.

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 environmental component requires research into a variety of elements that illustrate a company’s impact on the earth, in both positive and negative ways. Nike is a good example of a company that meets the environmental criteria for ESG. They are a leader in environmental efforts, their Flyknit and Flyleather products were developed with environmental sustainability in mind. Nike is a member of the RE100, which is a global initiative bringing together the world’s most influential businesses committed to 100% renewable electricity. Nike signed the RW100 agreement vowing to source 100% renewable energy across its operations by 2025.

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

There are a variety of different approaches when it comes to building a portfolio of ethical investments, some of the approaches are:

Negative screening

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.

Positive screening

Positive screening is the opposite; it identifies companies who are doing good work and invests in them. i.e. Renewable energy, health care, or a company like Tesla.

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.

Sustainability-themed investing

A sustainability-themed investing approach focuses on investments in the themes or assets that specifically relate to factors such as clean energy, green technology, sustainability agriculture and forestry, green property, and sustainable water supply.

Impact investing and community impact

This style of investing is aimed at solving social and environmental problems, while still delivering financial returns. It also includes community investing, which is where capital is directed to supply important goods and services to traditionally underserved people or communities, or financing that is provided to businesses with a clear social purpose.

Socially Responsible Investing (SRI)

SRI generally exclusively uses screens or filters, that investors can use to exclude certain companies and industries that don’t meet their particular criteria. An SRI investor screens investments decisions by tailoring it to their own values. For example, an SRI investor may screen out tobacco, alcohol, and weapon stocks. Leaving other companies and industries eligible to select for further analysis.

How do ethical investments perform?

While no investment is guaranteed, the performance of ethical funds has been shown to be similar to the performance of traditional funds. Morningstar examined 745 sustainable funds and compared them against 4,150 traditional funds, and found they matched or beat returns in all categories – whether bonds or shares, UK or abroad.

According to Morningstar, sustainable funds outperformed their traditional peers in 2019, with 66% finishing the year with returns in the top half of their Morningstar categories.

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.

Summing-up

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.

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.
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