In recent years, ethical investing has become more popular among investors. Between 2014 and 2017, ethical investing quadrupled and 90 percent of all Australians now expect their superannuation investments to be invested ethically and responsibly.

But everyone will have different views as to what ethical means and how you judge whether or not an investment is ethical.

Proactively ethical or just not unethical?

Some may choose to not invest in unethical companies or industries whereas others may only invest in proactively ethical companies.

The less proactive ethical investors may choose on an industry wide basis or consider the actions of individual companies.

For instance, investors concerned about the environment may choose not to invest in mining companies. Those concerned about gambling will not invest in companies that run casinos or manufacture poker machines.

Whereas the more proactive ethical investor may choose their investments on ESG (Environmental, Social and Governance) metrics.

ESG Metrics

 

Companies are not required to have an ESG report, nor are they legally required to provide detailed reporting on their ESG performance.

And many companies don’t provide investors with this level of reporting – which already rules out a number of companies as an ethical investment based on ESG metrics.

The Australian Council of Superannuation Investors (ACSI) and the Financial Services Council (FSC) put together a reporting guide to help companies establish a best practice for reporting on ESG performance.

A company is required to determine what ESG measures are important to them and what are impacting their business.

To then be able to track their performance they need to establish measures and targets against which they can monitor progress.

These may include environmental reporting data, carbon emissions, water management, waste production, diversity, health and safety incidents (and measures to improve), equal remuneration for men and women, supply chain audits, charitable endeavours, community engagement and staff wellbeing.

Criteria used by ethical funds

 

Not all investors will have the time to go into this much detail on individual investments and they may look to an ethical fund manager or exchange traded fund (ETF).

Looking at the criteria that they use may help aspiring ethical investors determine what to look for in an ethical investment. Or they may even wish to just follow the companies they invest in.

One performing ethical fund is BetaShares’ Global Sustainability Leaders Fund (ASX: ETHI). This ETF only invests in companies that are leaders in climate sustainability.

Among the companies they hold are tech giants Tesla, Apple and Netflix. The fund has returned 10 percent over the past 12 months.

Another is Russell Investments’ Australian Responsible Investments ETF (ASX: RARI) which pledges to avoid ‘unethical’ investments and invest in those with high ‘ESG metrics’.

Some eyebrows might be raised at some of the holdings, for instance 40 percent are financials, including large financial institutions caught out in the Royal Commission such as NAB and AMP. Another 16 percent are in mining and energy stocks including Santos and Woodside.

Another fund avoiding unethical investment is Pengana High Conviction Equities Fund. It pledges to abstain from those as well as animal testing, fossil fuels, weapons and those giving rise to human rights violations. This fund has returned 7.6 percent in the last year.

However, the fund is unlisted and there is less transparency surrounding its holdings, other than that they are limited to 20.

Then there’s Australian Ethical (ASX:AEF). Its fund aims to avoid investments that harm people, animals, society or the environment.

AEF avoids mining and nuclear power investments and opts for investments in renewable energy. They also avoid investments relating to gambling, tobacco, pornography, alcohol and palm oil. It is a supported of healthcare, technology, education, sustainability, transport, property and agriculture.

Its emerging companies fund includes stocks such as Rhipe (ASX:RHP), Bigtincan (ASX:BTH), Auswide Bank (ASX:ABA), Cyclopharm (ASX:CYC) and Capitol Health (ASX:CAJ). It returned 0.8 percent over the past 12 months.

‘Certified B Corporation’

 

A ‘Certified B Corporation’ are ‘businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose.’

The alliance describes itself as, ‘a new kind of business that balances purpose and profit.’

Members are legally required to consider the impact of their decisions on their workers, customers, community, and environment.

Businesses are judged on five criteria: governance, treatment of employees, community Impact, environmental impact and customer treatment.

They are then given a score out of 200 and any score over 80 unlocks the door to this certification

While there are some members in Australia, such as Beyond Bank and Hub Australia, very few of these are listed.

One ASX listed company on the list is ethical investment fund Australian Ethical Investment with a rating of 111.7 – more than double the median score for ‘ordinary businesses’.

As an increasing number of investors either want more than a financial return or don’t want to make money through harm – we could well see far more companies implementing ESG reports and positioning themselves as ethical investment opportunities.

 

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.