Ethical investing, together with environmental, social, and corporate governance (ESG) standards, has come to the fore with investors increasingly inclined to align their investments with their values.
So what is ethical investing, and what do related definitions like ESG, socially responsible investments and ethically conscious investing really mean?
What is ethical investing?
Ethical investing is a way to hold companies accountable for the environmental, social and ethical consequences of their actions. Ethical investing is also about making investing choices that align with personal values and seeking to use investment dollars to influence the way businesses behave. At its core, ethical investmentÂ is about investing with a conscience and choosing companies with a moral compass.
There are a few different types of ethical investing, encompassing subcategories like sustainable investing, impact investing, responsible investing, and ESG investing â€“ which can have some overlap in definitions.
Some investing approaches prioritise financial outcomes, but take social, environmental and ethical values into account, while other approaches prioritise values, and consider financial outcomes only after these values have been satisfied.
Interpretations of â€˜ethicalâ€™ can vary widely and investors need to be mindful of how â€˜ethicalâ€™ is defined, which is generally best illustrated by the screening processes that the fund manager employs.
What is an ethical ETF?
Broadly an ethical ETF is an exchange-traded fund that either excludes particular industries or companies from their investment holdings or specifically includes companies or industries that meet certain specific sustainability targets or criteria.
What makes an investment ethical? ESG (environmental, social, and governance) refers to three areas that can define how sustainable, responsible, or ethical a business is.
Though ESG is generally concerned with non-financial indicators, these issues are nevertheless relevant to board accountability and risk management practices, and so can have an impact on future earnings and financial performance.
Businesses that apply ESG standards might be more diligent, and more likely to succeed over the longer term. ESG factors are relevant for understanding corporate purpose and strategy, as well as management quality. They can help investors understand a companyâ€™s risk profile and evaluate how prepared the business may be for the future.
Here is an overview of what ESG stands for:
- Environmental â€“ Environment factors can focus on pollution generated, waste management practices, resource utilisation, carbon emissions, supply chain management, and impact on climate change
- Social â€“ Social factors might be concerned with how companies respect employees and people in the wider community. Relevant factors include workplace diversity, labour practices, working conditions, and work health and safety
- Governance â€“ Governance factors include corporate policies and company governance practices. Tax strategy, data security, product safety, executive compensation, donations, lobbying, bribery, misconduct, business ethics, culture, innovation, and board diversity could be relevant
What is SRI?
Socially responsible investing (SRI) takes non-financial criteria â€“ such as social, ethical, and environmental outcomesÂ¹ â€“ into account when investing. The goal is to end up with a financial and moral return by directing investment dollars towards the environmental and social issues that the investor views as important.
SRI is also known as sustainable investing, ethical investing, community investing, and green investing. SRI also encompasses impact investing, whereby making a positive social impact is the focus.
What are the benefits of investing in ethical ETFs?
Ethical investing and the use of ethical ETFs benefits investors, as it can enable people to facilitate change in the world and express their personal morals and values through their investment decisions.
Having gained significant traction in recent years, ethical investing also has the potential to effect social or environmental change in the long-term by essentially rewarding the companies that operate responsibly and helping them to grow.
A common myth associated with ethical investing is that people invest responsibly at the expense of financial performance. However, studies have revealed that companies with ethical credentials may perform better in the long term on the basis that governance, social or environmental issues can have an impact on growth2.
A further benefit to investing in companies with a strong ESG focus, is that these businesses may be less vulnerable to problems such as consumer boycotts, PR disasters or controversies (such as the Deepwater Horizon incident in April 2010), which may greatly cost shareholders.
For investors looking to invest in ethical shares to invest in, ethical ETFs may be a suitable option.
An Australian ethical ETF or an international ethical ETF enable instant diversification for portfolios, offering exposure to several companies that have been screened for ESG in one trade, eliminating the need for an investor to hand-pick and invest in multiple ethical stocks separately.
How can I invest ethically in Australia?
The definition of â€˜ethicalâ€™ or ‘ethical share investments’ can vary across providers, and therefore investors can find it challenging to work out whether a fund is investing in companies that are genuinely ethical (and consistent with their own ethical views). So, how can investors interested in buying â€˜ethical companiesâ€™ ensure they are investing in ethical funds or ethical shares that actually align with their values?
BetaShares offers Australian ethical investment options that trade on the ASX and use some of the most comprehensive ethical and ESG screening methodologies in the industry.
As an example, the BetaShares Australian Sustainability Leaders ETF (ASX: FAIR) is an Australian ethical ETF that provides exposure to a diversified portfolio of Australian companies that meet strict sustainability and ethical standards.
BetaSharesâ€™ ethical ETFs combine a fossil fuel-related screen with a broad set of ESG criteria, offering investors a true-to-label, sustainable and ethical investment option. Our ethical ETF range applies some of the industryâ€™s most stringent ESG screens.
In addition to fossil fuel-related screens, the screening process includes screens to remove companies or bond issuers with significant engagement in harmful activities and industries, whether that concerns people or the planet. Examples include armaments, gambling, animal cruelty, alcohol, and junk foods.
Businesses or bond issuers with positive sustainability and ethical business operations (e.g. positive environmental projects, renewable energy sites, and healthcare companies) are prioritised in the portfolio.
Why is ethical investing important?
Global warming is one of the defining challenges of the 21st century.
Unaddressed, modelling demonstrates it will have a potentially catastrophic impact on our planet and the lives of future generations. Many would argue the catastrophe is already unfolding.
Given the dimensions of the challenge and the size of the response required, the amount of money needed to be spent on it is correspondingly large. As such there is a compelling investment case for investing in companies whose activities seek to tackle todayâ€™s climate and environmental challenges.
The scale of the challenge the world faces means that innovation is called for in a range of climate- and environmentally-friendly activities. A focus on renewable energy is essential, but the deep cuts to carbon emissions that will be required to limit global warming cannot be achieved by clean energy alone.
A broad range of solutions that directly enable the reduction or avoidance of carbon emissions is needed, including clean energy, electric vehicles, energy efficiency technologies, sustainable food, water efficiency and pollution control.
For example, renewable energy cannot entirely replace fossil fuel emissions from carbon-intensive activities such as steel production, but improving the efficiency of such activities can have a meaningful impact on reducing carbon emissions.
In addition to renewable energy generators, companies that can reduce carbon emissions, create energy efficiency, or make our energy grids smarter, appear poised to benefit from the increased demand for products and services to deal with the emerging climate and environmental threats.
As the worldâ€™s population, and its need to be fed, continues to grow, companies that focus on food solutions that reduce carbon emissions have the potential to make a significant difference.
On the other side of the ledger, there is likely to be an increasing emphasis on being fossil fuel-free.
Not only is the avoidance of fossil fuel generators consistent with the transition to a net-zero carbon emissions economy, it also makes investment sense.
There is a significant risk that companies deriving significant revenue from generating, processing or distributing fossil fuels will have to write off current and future assets before the end of their economically useful life. In addition to this stranded asset risk, there are other risks, including that companies are potentially exposed to future litigation from their fossil fuel activities (relating to pollution or health).
BetaShares Ethical Funds
|DZZF> DZZF||BetaShares Ethical Diversified High Growth ETF - Gain exposure to a true to label multi-asset class ethical portfolio with high growth potential.> BetaShares Ethical Diversified High Growth ETF - Gain exposure to a true to label multi-asset class ethical portfolio, with high growth potential.||Download> Download|
|DGGF> DGGF||BetaShares Ethical Diversified Growth ETF - Gain exposure to a true to label multi-asset class ethical portfolio with the potential for growth.> BetaShares Ethical Diversified Growth ETF - Gain exposure to a true to label multi-asset class ethical portfolio, with the potential for growth.||Download> Download|
|DBBF> DBBF||BetaShares Ethical Diversified Balanced ETF - Gain exposure to a true to label multi-asset class ethical portfolio balanced between growth and defensive assets.> BetaShares Ethical Diversified Balanced ETF - Gain exposure to a true to label multi-asset class ethical portfolio, balanced between growth and defensive assets.||Download> Download|
|ERTH> ERTH||BetaShares Climate Change Innovation ETF - Gain exposure to a portfolio of global companies that are at the forefront of tackling todayâ€™s climate and environmental challenges.> BetaShares Climate Change Innovation ETF - Gain exposure to a portfolio of global companies that are at the forefront of tackling todayâ€™s climate and environmental challenges.||Download> Download|
|ETHI> ETHI||BetaShares Global Sustainability Leaders ETF - Gain diversified exposure to a portfolio of large global companies that meet strict sustainability and ethical standards.> BetaShares Global Sustainability Leaders ETF - Gain diversified exposure to a portfolio of large global companies that meet strict sustainability and ethical standards.||Download> Download|
|HETH> HETH||BetaShares Global Sustainability Leaders ETF â€“ Currency Hedged - Gain diversified exposure to a portfolio of large global companies that meet strict sustainability and ethical standards hedged into Australian Dollars.> BetaShares Global Sustainability Leaders ETF â€“ Currency Hedged - Gain diversified exposure to a portfolio of large global companies that meet strict sustainability and ethical standards, hedged into Australian Dollars.||Download> Download|
|FAIR> FAIR||BetaShares Australian Sustainability Leaders ETF - Provides cost-effective exposure to a portfolio of sustainable ethical Australian companies.> BetaShares Australian Sustainability Leaders ETF - Provides cost-effective exposure to a portfolio of sustainable, ethical Australian companies.||Download> Download|
|GBND> GBND||BetaShares Sustainability Leaders Diversified Bond ETF â€“ Currency Hedged - In one trade get exposure to a diversified portfolio of high-quality bonds meeting strict responsible investment standards.> BetaShares Sustainability Leaders Diversified Bond ETF â€“ Currency Hedged - In one trade, get exposure to a diversified portfolio of high-quality bonds meeting strict responsible investment standards.||Download> Download|
Investing involves risk. The value of an investment and income distributions can go down as well as up. Before making an investment decision you should consider the relevant Product Disclosure Statement (available at www.betashares.com.au) and your particular circumstances, including your tolerance for risk, and obtain financial advice. An investment in any BetaShares Fund should only be considered as a component of a broader portfolio.