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Australian investors are increasingly looking to align their investments with their values, and this means investing in environmental sustainability and social responsibility. For these investors, there are investment options that specifically target these outcomes: Sustainable funds, which are an investment option that not only seeks financial returns but also aims to make a positive impact on society and the environment.

But are there benefits to embracing sustainable funds that go beyond that, and what are the principles of ethical investing? For investors, there are several considerations in this dynamic and exciting area of investment that are worth considering.

Understanding Ethical Investing

Ethical investing, also known as socially responsible investing (SRI) or sustainable investing, is an approach that brings environmental, social, and governance (ESG) criteria to the forefront when determining how to make investment decisions, alongside financial performance The goal of these investors is, essentially, to use their money to “do good” and support the growth of businesses that seek to have a positive impact on the world, and by doing so also generate financial returns for the investor.

Benefits of Sustainable Investing

The next question is why people do invest in ethical investment? Overall, there are three primary reasons for most:

  1. Financial Returns
    • Contrary to the myth that sustainable investing sacrifices financial returns for ethical considerations, numerous studies have shown that sustainable funds can deliver competitive or even superior performance over the long term.
    • Companies with strong ESG practices may be better positioned to mitigate risks, capitalize on opportunities, and generate sustainable growth, translating into attractive investment returns.
  1. Environmental Impact
    • By investing in companies focused on environmental sustainability and renewable energy, investors can contribute to mitigating climate change, preserving natural resources, and promoting a transition to a low-carbon economy.
    • Sustainable funds may support initiatives like clean energy development, carbon emission reduction, and conservation efforts, fostering positive environmental outcomes.
  1. Social Responsibility
    • Investing in companies with high standards of social responsibility can help address social issues such as poverty alleviation, gender equality, and community development.
    • Sustainable funds may engage with companies to advocate for fair labour practices, diversity and inclusion, and corporate philanthropy, promoting positive social change.

Key Principles of Ethical Investing

There are three key areas that investors getting involved in ethical investing will focus on:

  1. Environmental Sustainability
    • Focuses on investing in companies that demonstrate a commitment to reducing their environmental footprint, such as those involved in renewable energy, clean technology, or sustainable agriculture. The company itself doesn’t need to be in a sustainable sector, however, it needs to have a stated, transparent and accountable commitment to sustainability.
    • Avoids industries with significant negative environmental impacts, such as fossil fuels, deforestation, or pollution-heavy industries.
  1. Social Responsibility
    • Supports companies that prioritise social justice, human rights, and fair labour practices throughout their operations and supply chains. A company that takes steps to guarantee that it isn’t sourcing its supply from businesses that employ child labour might be one example. Companies that commit to quotas of women in leadership positions or actively support causes against discrimination are another.
    • Conversely, investors will screen out companies involved in controversial activities like child labour, discrimination, or unethical treatment of workers.
  1. Governance
    • Emphasises investing in companies with transparent and accountable governance structures, including strong leadership, ethical management practices, and diverse board compositions.
    • Engages with companies to advocate for improved corporate governance and responsible business conduct.

Key Considerations for Australian Investors

There are plenty of reasons that people want to get involved in ethical investing. It can feel like you’re making a positive difference, and many of the most exciting companies with the greatest potential are also involved in ethical investing. As with any form of investment, however, there are a series of considerations that you’ll need to make to ensure that your investment is delivering what you need it to. These include:

  1. Investment Objectives
    • Define your investment goals, risk tolerance, and time horizon to determine how sustainable funds align with your overall financial strategy.
    • Consider whether you’re seeking long-term capital appreciation, income generation, or a combination of both from your investments.
  1. Fund Selection
    • Research different sustainable funds available in the Australian market, considering factors such as investment philosophy, ESG criteria, performance track record, and fees.
    • Evaluate the fund’s holdings to ensure they align with your values and preferences, examining factors like industry exposure, company practices, and ESG ratings.
  1. Performance and Risk
    • Assess the historical performance of sustainable funds compared to conventional investment options, taking into account both financial returns and ESG impact.
    • Understand the potential risks associated with sustainable investing, including sector-specific risks, regulatory changes, and market fluctuations.
  1. Diversification
    • Maintain a diversified investment portfolio by allocating assets across various asset classes, sectors, and geographical regions to reduce concentration risk.
    • Consider complementing sustainable funds with traditional investments to achieve a balanced and resilient portfolio.
By understanding the principles of ethical investing, conducting thorough due diligence, and making the right investments, investors can build portfolios that not only deliver financial returns but also actively contribute to a more sustainable and equitable world.
Reach out to your Oracle adviser for more information, but just know that with so much innovation coming out of these companies, this is also an excellent opportunity to invest at the bleeding edge.
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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