If you want to invest ethically, finding causes you’re passionate about is important. (ABC News: Andrew Harrison)
The establishment of compulsory superannuation in Australia means every single worker in this country is effectively an investor.
Since different super funds help finance various industries and businesses, without realising it you could be giving money to things you have major moral objections to.
The thought of this may be overwhelming, but the solution is easier than you might think.
While you may not be able to list off causes you passionately support, chances are you know the types of industries and companies you want nothing to do with.
Eliza Katsourakis, 23, is one of many keen to invest her money in companies that are doing their part for the environment and treating their workers fairly and equally.
She wrote to the ABC Personal Finance project to ask us how she can make sure her super is invested ethically.
What do you care about?
Ethical investing is a way for people to target areas they feel help the planet, or do some good for society while excluding those they believe cause harm.
Karen McLeod, a financial adviser at Ethical Investment Advisers in Brisbane, says the first step towards ethical investing is figuring out precisely which causes and industries you are passionate about.
But, because of the sheer volume of options available, Ms McLeod suggests it is probably easier to begin by choosing those sectors you object to.
“More recently, there’s been things like avoiding uranium mining, coal seam gas exploration, old growth forest logging and fossil fuel financing, with people preferring to invest in a future they see as more sustainable through clean energy, energy efficiency and clean transport,” she said.
This “negative screening” process is pretty much exactly how the ethical investment industry goes about filtering the companies and industries it considers unworthy of support.
Aman Ramrakha, the Australian director of research ratings at global investment research firm Morningstar, says it is a sensible way to get started.
“Ethical funds generally screen out certain industries and companies that play in those industries, and generally some of those more common negative screens are things like tobacco or armaments,” he said.
Around the world, the ethical investment industry relies heavily on the 17 sustainable development goals set up by the United Nations.
Described by the UN as a “blueprint to achieve a better and more sustainable future for all”, their goals include things like eliminating poverty and hunger, the provision of quality education, achieving gender equality, clean water and sanitation, affordable and clean energy, sustainable cities and communities and climate action.
Ask your super fund what they screen out
Around the world, the ethical investment industry relies heavily on the 17 sustainable development goals set up by the UN. (Supplied: Tashara Roberts)
Once you know where you are happy for your money to be spent, the next step is asking your own superannuation fund about its negative screening process.
Mr Ramrakha says while that may seem time consuming, there is actually very little legwork involved.
“Call them up and say ‘do you screen something out and if so, what is that?'” he said.
“Tobacco is probably one of the most obvious exclusions in recent times and if that satisfies you, great, but you can also ask for more information on which industries or companies they’re actively supporting.”
He says the popularity of ethical investments means more super funds are providing detailed information on their websites, about which industries and businesses they help finance.
Ms McLeod says super funds have begun to understand their role goes beyond simply generating a financial return for their members.
“They know they have an obligation to be a responsible investment caretaker for their members’ money,” she said.
“So a lot of them are already looking closely at a company’s environmental track record, or how that firm is paying their staff, whether it has a secure supply chain, or questioning whether a blind eye is being taken by that corporation to certain issues.”
Women and young workers tend to show an interest in investing ethically, Ms McLeod says.
Despite the “set and forget” attitude most Australians bring to superannuation, research shows that as a country, we want our super funds to do the right thing.
A 2017 survey by the Responsible Investment Association of Australasia (RIAA) shows nine out of 10 Australians expect their superannuation to be invested ethically and managed to balance their personal values and financial interests.
Ms McLeod says in her 12 years of experience working in ethical investing, she has noticed a particularly strong interest among women and younger workers.
“It’s often women who are interested in this type of investing and what we find is they then convince their husbands or partners to become involved as well,” she said.
“There’s a fast-growing movement towards people wanting their money invested ethically, because I think people can see day to day, the impact of very poor corporate citizens and people don’t really want their money to be fuelling that sort of future.
“They want peace of mind knowing they’re actually supporting positive initiatives that are actually doing good and performing well.”
Ethical investing could give you peace of mind about your money. (Pexels: Daniyal Ghanavati, CC0)
What about my other investments?
As more and more people have shown interest in ethical investment options, it has become much easier to find resources that can help you to put your money where your morals are.
Most financial advisers have information on responsible investing and there are a growing number of funds that are strictly focused on social enterprises, renewable energy sources, et cetera.
However, without even booking an appointment with an adviser, it is possible to do your own research and check out what a company is doing in terms of its social and environmental goals, called Corporate Social Responsibility (CSR).
Most big businesses detail the work they do to meet their CSR goals on their websites and annual company reports.
How do ethical investments perform?
Not so long ago, the idea of making a healthy profit and turning the world into a better place were completely at odds.
But, the pressure for corporations to become more responsible global citizens means ethical investments now make up most of the overall investment market in Australia.
Research by the RIAA shows in 2017, the responsible investment industry consisted of $866 billion in assets or 55.5 per cent of all assets professionally managed in Australia.
Ms McLeod says where returns are concerned, ethical investments regularly punch above their weight.
“The RIAA has done a benchmarking report every year for the past 20 years and compared to the mainstream options like the ASX 200 or a balanced portfolio, responsible investments have pretty much always outperformed, over almost every single period — three, five, 10, 15 years,” she said.
Retiree Lesley Hughes says the money she has made has grown substantially since switching to ethical investments.
“Our money was going backwards with our old super — we were just not keeping up because the fees were eating into it and what’s happened now, is that we’ve done much better.
“I should add that my husband and I are in very safe funds because of the time of life we’re in — we can’t go in high risk — but the returns have just grown instead of going backwards all the time,” she said.
Mrs Hughes says apart from the money she’s now making, her goals of supporting renewable energy and recycling are being met.
“I wanted to avoid fossil fuels, uranium mining, weapons, chemicals, anything to do with animal research, things like that,” she said.
“And so it definitely makes a difference to me, the fact that I am now actively avoiding making problems like climate change worse through the choices I am making with investing my money.”
However, Mr Ramrakha says there will be some instances when ethical investments will not do as well as traditional investments, especially if those industries you have screened out are doing well.
“Say for example, you are screening out tobacco stocks, there may be periods in time where tobacco stocks are in favour from a broader market consensus, so it can ebb and flow,” he said.
“It can also work in your favour, so if we’re at the end of a mining boom and the miners are out of favour, your portfolio reflects, against a standard benchmark, a better return.”
Does it cost more to invest ethically?
Buying ethically is often associated with paying more for products or services because of the higher costs linked to how those things are made or sourced.
However, Ms McLeod says as more people choose ethical investments, the costs are coming down, and that is being helped by technological advances in the financial services sector.
“The fees have traditionally been higher because there is more work involved but they’ve come down dramatically over time and it’s a lot easier now to find out what different companies are doing, which reduces that workload.
“There are a lot more research houses globally that are reporting on this type of information and companies are providing information in their annual reports about their social and environmental contributions, so that makes access easier and therefore it’s cheaper for clients as a whole,” she said.
Mr Ramrakha agrees: “In terms of fees for ethical investing versus fees for mainstream funds, I think they’re generally in the ballpark and these days the ethical process doesn’t add a significant workload, so I don’t think we’re seeing ethical investments priced at a significantly higher premium than the mainstream.”
Meanwhile, Ms Hughes says while the fees for her ethical investments aren’t necessarily cheaper than her former superannuation fund, she is in a much better financial position now.
“The fees, when you invest in your standard super account are declared, but you often don’t see how much your financial adviser is making.
“I still now do gulp when I see the fees we pay on our investments, but then the actual returns on a year when you take everything into account means we’re still ahead, and this is in a very safe, low-risk fund.”
She’s encouraging young people to embrace ethical investing to shore up their superannuation savings, while at the same time, knowing they are doing something positive to help the planet.
“I feel very strongly that it’s another avenue for activism.”
If you still aren’t sure whether ethical investing is the path for you, there are resources available to help.
The RIAA has built a responsible returns tool, where you can look up any of the ethical funds in the country that have been certified under the program, and you can see exactly what they are promising to do.
This article contains general information only. It should not be relied on as financial advice. You should obtain specific, independent professional advice from a registered financial planner in relation to your particular circumstances and issues.
Are you a young woman who needs help to manage your money?
We know you have unique challenges as overall, young women:
- Earn less than men
- Have less money in our superannuation
- Are more likely to have career breaks
- Have lower levels of financial literacy
It’s time to change things. We want to help you to become more confident about money and have the skills and information you need to shore up your financial future.
So let’s do it together.
Send in your questions about money using the form below and we’ll try to get our journalists to find you an answer.