Is this the latest fad when it comes to investing? Is it just another way to charge high fees? Or is this the future and can your investment strategy actually help save the planet?
I remember in the 80s when clients of mine asked could we invest into ethical funds. At the time that just meant not investing in tobacco companies – it’s come a long way since then.
In a recent Financial Review article it states that now 40 cents in every professionally managed dollar is being overseen by ethical investment funds. Around a third of it relates to climate change.
So what do you need to know about ethical investing? What is considered as an ESG? And should your superannuation, for example be invested this way, or at least some of it?
But first, what is ESG?
ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their research when looking at new investment funds, on top of the traditional risks and growth opportunities.
ESG is also known as SRI (socially responsible investing), and for many funds, they have seen investors wanting more options or alternatives to align their investment portfolio more closely with their personal values.
This all makes sense on the surface, as who wouldn’t want their investments and superannuation dollars being used to help the planet, seems a win-win situation. But while it’s the right thing to do, is it the smart thing to do? In my opinion it is, and it’s for the following reasons:
- Influence – many think that ethical investment fund managers are just investing in companies that do the right thing, which is true to an extent as most would keep away from Gambling companies for example. However, with so much in superannuation for example, available for investment, it can lead to investment fund managers looking deeper and even looking at the governance of a company’s Board or the way it treats its staff. This can have a major impact on these companies and influence them to change their ways.
- Returns – traditionally ethical funds didn’t perform as well, which would mean you wouldn’t receive the same level of returns. Now with so many fund managers taking ethical investment seriously, the choice of ethical funds has increased, and performance has shifted closer to standard funds. In fact, since the downturn in March last year, the Australian share market has bounced back by around 35% and ethical funds have performed just as well as standard funds with the same share market exposure.
- Cost – ethical funds were two to three times more expensive than standard funds. But just as standard funds and platforms have seen a real competitive fee reduction in the last 10 years, we have seen the same with ethical funds. You may need to do a bit more research to ensure you know exactly how much you are paying, but this is not the major problem it was years ago.
- Greenwashing – this is a fairly new term whereby a company is conveying a false impression about how its products are more environmentally sound. Understandably with so much investor money about, companies want to make sure they are ticking the social and ethical al boxes. While this is short term thinking which is a problem, in the long term most companies will get found out or actually realise that many of the changes will have a positive effect on their company, both internally as well as its performance.
But are they suitable for everyone?
This is a tough one as while you are trying to do the right thing for the planet, it may not be the best thing for you, and you should seek to get advice. To give a good example, many of the funds are long term growth type investments, and that’s perfect for a millennial or anyone with a long-term time frame. However, if you are a retiree and your investments become your main income source, long term growth might not work. Or you may be a conservative investor, and so you don’t want as much invested in shares, as even if you do want to do the right thing, you still need to be comfortable with how your money is invested.
So before making an investment, get advice and make sure it fits with your goals and objectives – as well as wanting to help the planet.
Article by Marc Bineham – Money coach, speaker and award-winning author of The Money Sandwich