How to invest ethically in Australia
Here are 4 ways to make sure you're making ethical investments in Australia:
Ethical investing in Australia
Ethical investing: make money and feel better about yourself at the same time.
Key takeaways
- Ethical investing is a strategy that prioritises investing in companies and assets that are considered ethical.
- ESG (ethical, social and governance) is the most common approach to ethical investing.
- 88% of Australians now expect their investments to be responsible and ethical.1
What is ethical investing?
Ethical investing means different things to different people, but as a basic rule it is about aligning personal values with your money.
Investors who have an ethical focus will usually invest based on environmental, social and governance (ESG) criteria.
For example, some investors might avoid supporting companies that have a negative impact on the environment, while others may feel more strongly about gambling, pornography or weapons production.
You could also take the approach of only investing in companies that are actively making a difference in the world, or excluding companies that are having a negative impact.
How do I know it a certain investment is ethical?
To invest ethically, you'll need to figure out which companies or products align with your values. Unfortunately, few companies make this information easy to find.
It's not mandatory in Australia for businesses to publish information about their ESG practices, but most businesses that are doing the right thing look to highlight this.
So if a company isn't transparent about their operations or business ties, that can be a red flag in itself.
To gain a measure of a company's ESG performance, investors can turn to the following sources:
- Company reports and annual meetings
- ESG rating agencies
- News articles
- Other third-party reports
A publicly listed company has to release full details of its operations twice a year – these are called earnings reports. This will allow investors to gain a snapshot of the business's operations.
Businesses will also host an annual general meeting (AGM). During this time, investors hear from the board of directors and get the opportunity to vote on key company decisions.
Finder survey: How important are ESG factors in where Australians choose to invest?
| Response | |
|---|---|
| Not important | 47.51% |
| Somewhat important | 43.63% |
| Very important | 8.86% |
Source: Finder survey by Pure Profile of 1004 Australians, December 2023
Ethical investing approaches
There are a few main ways to approach ethical investing in Australia:
1. ESG investing
ESG investing is a type of ethical investing that specifically filters potential investments by their positive approach to environmental, social and governance factors:
- Environmental factors are actions companies and governments make towards the planet. It includes things like greenhouse gas emissions, waste management and energy efficiency.
- Social focuses on how companies impact society. This is more concerned with how the company treats its staff, its labour standards, supply chains and its stances on social issues such as child workers.
- Governance focuses on the way the company is run. It is about rules and principles that define rights, responsibilities and expectations between stakeholders.
While most ethical investors would only consider companies that score well on all 3 categories, others may be willing to overlook a poor showing in one category if the company is strong on the other two.
For example, a mining company may score poorly on the environmental front, but may have impressive workplace policies and a progressive approach to governance.
2. Negative screening
Negative screening is the most common approach to ethical investing. It simply means an investor will exclude companies that fail certain ESG metrics.
For example, an investor might refuse to invest in any fossil fuel companies
Of course, This can vary from investor to investor and what you personally choose to negatively screen is completely up to you.
3. Positive screening
Also known as impact investing, positive screening means choosing to invest in companies that are actively making a positive difference in the world.
This could include companies focused on things like renewable energy, healthcare, education or positive technology.
Whether that is notable work for the environment, strong social causes or good governance, positive screening involves supporting "good" companies.
What type of ethical investments are available in Australia?
Ethical stocks
For instance, there are many investment funds today that offer a whole portfolio of ethically screened stocks. This can be a much easier option than searching for this information yourself.
Ethical ETFs
If you're looking to invest in companies that align with your values but find individual shares overwhelming, you could try ethical exchange-traded funds (ETFs) instead.
Australia has more than a dozen ethical-themed ETFs listed on the Australian Securities Exchange (ASX), including:
- Betashares Global Sustainability Leaders ETF (ASX: ETHI)
- Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG)
- Betashares Global Sustainability Leaders ETF (ASX: HETH)
- Vaneck MSCI International Sustainable Equity ETF (ASX: ESGI)
- Betashares Ethical High Growth ETF (ASX: DZZF)
Ethical robo-advisors
Robo-advisors are investment platforms that typically recommend investment portfolios for you based on your personal goals, risk profile and other criteria.
As robo-advice continues to grow, it is creating specific niches for different investors' needs, with one being ethical-based portfolios.
Some robo-advisors with ethical portfolio options include Super Obvious, Stockspot and Bloom Impact.
Ethical super funds
An ethical super fund invests its members' money in an ethical or socially responsible way.
Again, ethical can mean different things to different people depending on your personal values, with superannuation funds following their own ethical guidelines. Many super funds now offer an ethical portfolio option to investors.
According to the most recent RIAA study4, the following 10 super funds were ranked as the leading responsible funds:
- Australian Ethical
- AustralianSuper
- Aware Super
- CareSuper
- Cbus Super
- HESTA
- Future Super
- Rest
- Telstra Super
- UniSuper
Expert insight: How Australian Ethical approaches ethical investing
"Every investment decision made at Australian Ethical is guided by an Ethical Charter that sets out our high-level principles and creates very clear investment parameters. Our in-house Ethics Research team then develops frameworks that contain a mix of quantitative and qualitative criteria to set out how the Charter principles will apply to any given industry or on a specific issue. These are updated as the world and our understanding of it changes."
ESG ratings in Australia
An ESG rating or score aims to measure a company's environmental, social and governance performance to help investors choose what they want to invest in.
There are several rating agencies in Australia that provide ESG scores for publicly listed companies.
In Australia organisations including the RIAA can help investors make more informed ESG decisions. For overseas investments, MSCI ESG ratings and Sustainalytics ESG ratings can help investors.
Alternatively, some online trading platforms and websites offer screening tools to help investors identify certain traits in companies or avoid investing in companies that don't align with their values.
What is an ESG framework?
ESG frameworks are sets of guidelines that third-party organisations use to help companies manage their ESG commitments.
Basically, they provide directions on how to create ESG reports and how the business itself will share its ESG progress with the world.
How these organisations implement ESG strategies will differ, but they will all have similar goals such as reducing environmental impacts, lowering their carbon footprint or creating more robust working conditions for staff.
Why impact investing?
Other than the obvious social benefits, there is also a compelling investment case for impact investment.
First and foremost, these are in growing areas. The world is looking to solve its issues including climate change. This will cost consumers and governments trillions.
But what is a cost for these groups is also an opportunity for businesses that are looking to solve these problems.
At the same time, these companies may be supported by regulation as policymakers seek to bring about change with legislation. These may be companies that recycle or generate power from renewable sources.
Going further, these companies may also be less likely to be involved in scandals or issues that can be detrimental to share prices.
Compare trading platforms to invest ethically
The following trading platforms offer either ESG investment portfolios or ESG screening tools to help you select stocks or ETFs based on your ethical criteria.
1 - 1 of 1
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Pros and cons of ethical investing
Like any form of investing, there are pros and cons when it comes to choosing to ethically invest.
Pros of ethical investing
The pros of ethical investing are obvious:
- Using your money for good. You can align your investing with what you believe in.
- ESG is growing. ESG investing is getting more popular and as a result, good ESG companies are growing, too.
- Performance. McKinsey research shows returns can greatly improve when ESG metrics are considered.
Challenges in ethical investing
While ethical investments can provide strong returns, these investments also throw up more challenges than traditional investments.
Here are 5 potential challenges with ESG investing:
- Lack of universal standards. ESG and what an investor wants to exclude is a personal decision, meaning there is not a universal agreed-upon standard. This leads to inconsistencies when it comes to ESG portfolios and funds.
- Greenwashing. Companies currently self-report their sustainable data. This leads to issues including greenwashing where a business enhances its environmental impacts without delivering any real-world benefit.
- You may pay more in fees. Typically ethical investing comes with higher fees than competitors' standard mutual funds. This is especially true if you compare a passive ETF to an actively managed ethical fund. Overall, higher fees can significantly erode returns, hurting investors' longer-term outputs.
- Limited options. By screening out companies you could remove winners from your portfolio.
- Lack of potential. While investors might want to invest in products that have the most impact on society, they might not necessarily lead to greater returns. Even in a growing sector, say climate change, not all ideas or businesses will outperform, even if the sector as a whole does. Investing in ideas that have limited commercial potential might lead to poorer performance.
VIDEO: Is ethical investing worth it?
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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