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What is ethical investing and how can I do it

Table of Contents

There is a new buzzword in the world of finance, and it’s ethical investing.

Ethical banks. Ethical investments. Ethical funds. Ethical options.

But what does it all mean?

It means you can now align your money with your values.

Things like the environment, renewable energy, the safety of animals, or even the social impact in your community can be emphasised now when you invest your money.

Ethical, sustainable, responsible – whatever you want to call them – they are here and more available to you than ever before.

This post will dive will explain what these terms me, how they can impact you, and several investment or banking products you can use to align your money with your values.

Note: While there are plenty of terms like social, ethical or responsible investing used, I’m going to stick with ethical for this article to encompass all these terms.

What started as a niche set of products or investments is now going mainstream.

A few years ago, when I was working in Superannuation one of my jobs was to do competitor analysis.

Not just on the big funds, but the up-and-coming ones that we should keep an eye out for.

Funds like Spaceship (technology investing), Verve (women focus) or Raiz (app based) all had a specific focus on how they wanted to approach the market.

Back then my take on ethical investing was that it was just putting money into wind farms and green energy. 

That’s part of the story behind this type of investing, but I guess the best way to explain what the angle is that it invests money with values.

Values on where the money does and doesn’t go.

Years later and I’ve come on board to the ethical investment train.

I‘ve added some ethical options to my portfolio and would say it’s a key part of my investing strategy

Can we make money more meaningful?

It seems a bit weird to say, but investing with an ethical and sustainable lens has given me more of a connection with my portfolio. It’s not purely about dollars, returns and growth.

It’s about what my money is doing and who it is working for.

While there is that feeling of good will and faith that your investments are wonderful for the world, there are still a few caveats. Mainly that everyone has different standards for ethics, sustainability and morals. 

We’ll get to those as we continue, but let’s start by trying to work out what an ethical investment is.

Ethical investing isn’t a new thing

Responsible or ethical investing stems back to the BC era.

Back in biblical times, it was Judaism that saw a need for justice and equity in their economics. Jewish law states that as investors you need to use their holdings to prevent immediate and potential harm. 

(This is your first example of how ethical investing is actually a value-based type of investing. )

Sticking with religion, there are also some similar guidelines in the Qur’an. This is a philosophy to govern the relationship between risk and profit, along with the responsibilities of institutions and individuals. So maybe what was old is just new again? 

What are the definitions of ethical investing today?

Ethical investing is the practice of using your ethical principles or values as the main filter for your investments.

While ‘standard’ investors focus on returns or costs, an ethical investor would look at how investment options align with their moral or ethical principles.  

Another term for ethical investing can be sustainable investing or impact investing.

Ethical investors might avoid certain stocks like gambling, alcohol, guns, weapons, fossil fuels or mining. 

Ethical investing can have you targeting or owning investments fitting in a certain category – such as wildlife, conservation, green technology or social causes.

For the sake of this article we are calling ethical investing as the investing you do, while ethical investments are what you buy to invest in ethically. 

Here are some acronyms and terms that will pop up when you are looking into ethical products:

Socially Responsible Investment (SRI)

These investments include companies that engage in social justice, sustainability, clean technology or other alternatives.

We can interchange the term SRI with others like ESG (see below) or more broadly – ethical/social investing.

Environmental, Social and Governance (ESG)

Here in in Australia they label many ethical investments ESG. A label like this might mean that the fund, bank or investment wants to focus on companies that feature these three factors.

  • Environmental factors – energy use, use of natural resources or treatment of animals.
  • Social factors – the way the company conducts business, how it works with supplies and the local community.
  • Governance factors – how the company manages its accounts, relates to political situations or its cooperation with the law. 

What makes an investment ethical 

It depends.

Everyone’s definition of ethical is different.

There are no set of parameters that you need to meet to become “ethical”.

There are some organisations that help us decide on what is responsible or ethical.

The Responsible Investment Association of Australia has its own certification. This is the leading initiative for responsible, ethical or impact investment products in Australia and New Zealand. 

Several funds or ETFs* adhere to this certification so we can at least know it goes through a stringent program to classify itself as an ethical investment.

*These investment products are a collection of companies deemed ethical or responsible for how they do business. 

While these certifications help highlight the funds that focus on being a strong ethical choice, there is no guarantee that the funds or ETFs will completely match your ethics or values.

You can dive into what makes up a certified investment fund and make your own decision on whether the group of companies are aligned with your values.

Other options are to pick individual stocks yourself (higher risk) or stay in cash (lower returns).

Here is an explainer of how the super fund Australian Ethical invests its money, which is provided by member balances.

What do ethical investments include in screens

Screens are a set of filters that keep your money going towards certain types of companies or not.

Investment products might avoid certain companies like gambling, alcohol, guns, weapons, fossil fuels or mining. They then might “screen in” companies that will have a big social or environmental impact like ones that build electric cars, renewable energy or sustainable farming.

Each fund, investment or bank may have it’s own set of screens where they detail what is included or not included.

Super Funds such as Australian Ethical include a charter that highlights the process they go through. 

For them they have a negative screen for things like tobacco or coal, while a positive screen for medical breakthroughs or efficient transport.

Other investment products might track an index that is set up to be a targeting sustainable company. 

Personally, I invest in BetaShares Sustainability Leaders ETF (ETHI) via CommSec Pockets which tracks an index of climate change leaders (measured by their carbon efficiency).

You can see here already the difference in ethics from just two “ethical” products.

No two products will be the same.

As it’s such a subjective topic, you will need to do your individual research to determine just how closely aligned these ethical products are to your values.

What is Greenwashing? It’s a good thing, right?

Ahh, no. Not really.

It’s what happens when a product is marketed as an environmentally friendly product but has a minimal impact in that area.

The product might include a few aspects of an ethical fund (like a cool name, logo or promo video) but behind the scenes is made up of everyday non-value-based investments.

It’s like when you buy a food labelled organic, but then look at the ingredients and struggle to find anything organic in the list.

Luckily transparency is very obvious nowadays so every investor can do their due diligence and work out what it includes in their investment. 

Ethical investment products in Australia

Say you want to go more ethical with your financial products. Where do you start and what do you pick from?

Luckily in this era there are new products launching all the time. It also means you have a lot more research in front of you to determine if these ethical products match your values and principles. 

I’ll give you some help and list out some products available for ethical investing and ethical focussed banking

Every ethical product will be different. You will need to determine if the team being in the fund can do a good enough job of matching their investment choices with your values.

Ethical banking products for everyday use

If you are looking to banking with a more ethical institution here in Australia here are some banks that mention how they operate to make an impact:

I would call Bank Australia as a front runner in the space and a bank fully focused on making an impact both socially and environmentally. They have a full suite of products including home loans, transactional bank accounts and insurance all with their values behind them. 

While I consider Bank Australia the leader in this type of banking there are others that feature standards on how they want to maintain a more responsible focus, including the big four:

On top of entire banks announcing new responsible and ethical initiatives, there are some specific ethical products out there handy for those looking for a more “green” option:

  • Loans.com.au Green Loan – a discount on your loan if you borrow for a certified green car like a hybrid or low emissions one
  • uBanks Green Term Deposit – If looking to store cash, these deposits are used for renewable energy projects
  • The Bendigo Bank Community Saver allows you to donate some or all of your interest to an organisation of your choice 

Investing inside your super with ethical, social or sustainable options.

Each fund might call them something different, but it's now common to see an ethical option you can put your money into.

Matching your super to a more sustainable or responsible option is probably the easiest way to start ethical investing for most people.

I use SunSuper and see that they have a Socially Conscious Balanced.

There are also some funds that are 100% into ethical investing, meaning everything you can invest in through that fund has a set of social, environmental, religious or ethical values.

Invest ethically via the Raiz Investing App

I’ve included this first because I invest in it and it’s also a fine option for new or minimalist investors.

When investing via Raiz you have the option to select one of a number of portfolios to invest your money in. You must select one alone, and the Raiz Emerald Portfolio is the one geared towards ethical investments.

This product is a portfolio of three ETFs, including the two most successful ethical ETFs in Australia.

  • ETHI – BetaShares Global Sustainability Leaders ETF
  • Russell Inv Australian Responsible Investment ETF
raiz-emerald-portfolio
A breakdown of the Raiz Emerald Portoflio

RARI is an Australian Responsible ETF that targets companies with positive environment ethical, social and governance  (ESG) policies. 

ETHI is similar, but focussing on global companies with ESG values.

Note that these two ETFs make up 72% of the portfolio with the rest made up of government bonds and cash, which aren’t ethical in the same way the main two ETFs are.

I’ve written about Raiz in my article on investing apps and this can help explain the process and cost of using a product like this.

For Raiz, get a $5 bonus when you create an account here.

Build a DIY Portfolio with Ethical ETFs in Australia

The next option you have if you are feeling more of a DIYer is to build a portfolio of ETFs that are sustainability focussed.

You can mimic the way Raiz builds it ethical portfolio by buying each ETF individually, but then giving you more control of how much of each you own.

Two of the biggest ETF providers in Australia have launched some options in the last few years worth considering here. Both Vanguard and Betashares now offer some equivalents to the standard ETFs that we are probably more familiar with (the VGS, IOO, VDHG and others).

Note that while it’s easy to compare a broad ETFs (such as Australian ETFS VAS, A200, STW) by price and return, comparisons of ethical products side by side are difficult due to the different style of environment, social or governance standards they set.

What are the Vanguard’s Environmental, Social and Governance (ESG) ETFs?

You can build a simple, reliably ethically conscious portfolio with the three ETFs Vanguard has in their ESG range now.

They launched VESG and VEFI in late 2018, in response to demand for these style of products

VEFI is a Bond Index ETF, meaning it contains ethically conscious global bonds that are less risky than shares, and the focus is on income returns.

VESG is an ethically conscious International Shares Index ETF that tracks large companies around the world (minus Australian companies)

In late 2020, Vanguard launched the VETH ETF which is the Australian focussed ethically conscious product.

To compare the cost of these products to non-ethically conscious products, this is how I would do that:

  • VEFI (cost of .26%) compares to non-ESG VAF (cost of .20%)
  • VESG (cost of .18%) compares to non-ESG VGS (cost of .18%)
  • VETH (cost of .16%) compares with non-ESG VAS (cost of .10%)

These costs are phenomenally low compared to what Ethical products have cost previously.

I won’t add in comparison of performance since none of the ethical ETFs have been around that long.

One interesting point wit the Vanguard ethically conscious ETFS is that the ESG and non-ESG ETFs also seem to have the same amount of holdings. You’ll probably need some research to see exactly what fits the bill in terms of making it to an ethically conscious fund.

BetaShares Diversified Ethical Investments

If you want an all in one ethical ETF, similar to the Vanguard Diversified ETFs (such as VDHG, VDGR) or the Raiz Emerald portfolio, then BetaShares is the way to go.

In late 2020, Betashares repositioned some of its diversified ETFs to become a range of ethical diversified ETFs.

  • DBBF – Ethical Diversified balanced ETF
    • 50% Global Bonds, 20% Fair, 30% ETHI
  • DGGF – Ethical Diversified Growth ETF
    • 30% bonds, 28% FAIR, 42% ETHI
  • DZZF – BetaShares Ethical High Growth ETF
    • 10% bonds, 36% FAIR, 54% ETHI
  • The cost of each of these ETFs is .39%

ETHI is the global market ethical ETF, while FAIR is the local Australian market ethical ETF in these portfolios.

So if you like the idea of an all in one, but want to trade directly via an online broker, then these are an option now available.

The Vanguard diversified range is cheaper at .27% but I would say this cost is very marginal and both are “cheap”.

If you want to build a DIY portfolio of ETFs, then you can sign up to SelfWealth (my online brokers) and receive 5 free trades, to begin with.

A note on selecting ethical investments

You will need to do your own research and understand the individual holdings and philosophies of each fund. The product pages of each should tell you cost, return, and individual holdings.

Is ethical investing worth it?

If you have some high convictions on where your money goes, not just how much it makes you then yes ethical investing is worth your time.

You definitely need to research and determine:

  • What companies your investment is buying
  • What managements principles and values are
  • Are you ok with the level of ethics being applied?

Does ethical investing make a difference?

Some people say that not investing in unethical companies doesn’t make a difference because they will continue to exist, regardless.

This is a short term view and glass half empty.

On the flip side, investing ethically strengthens and supports the companies trying to do what they deem is responsible socially and environmentally.

This can happen while avoiding awful companies and stand for the things you believe in. 

Is it worth the high cost to invest ethically?

Ethical investment products when they first came out where quite high compared to what already existed.

The main reason for the cost is due to needing to have a set of rules and screens managed so certain companies are kept in and out.

The good news is these days costs are coming down with the popularity of products and uptake.

How do the returns of ethical investments compare with non-ethical funds? 

Ahh yes, the big questions.

The quick answer is they are very comparable, but only in recent years as many ethical products are new. In fact, the last few years ethical funds have outperformed their non-screened counterparts. 

Whether this be that managers of the funds are doing a good job, or that consumers are aligning themselves with more socially conscious funds.

It is a small sample size as most ETFs and ethical super options have been around only half a decade.

Let’s look at an example to see what exactly the difference is (Comparison data from December 2020).

Comparing Global ETFs with Ethically Conscious Global ETFs

The first being an everyday international index fund, the popular Vanguard .Index International Shares ETF – VGS.

Your other investment is into the BetaShares Global Sustainability Leaders ETF – ETHI.

  • VGS returned per year 9.85% the last five years, not bad.
  • ETHI on the other hand 20.54% per year over the last four years (from back when it launched)

So without even needing to factor in cost you can see that the ethical investment here was the winner.

Comparing Australian ETFs with Ethically Conscious Aussie ETFs

The first is the famous VAS – Vanguard Australian Shares Index fund.

This returned 9.53% a year over the last 5 years.

The other is RARI – Russell Investments Australian Responsible Investment ETF.

Over 5 years this fund returned 6.52%.

Advantage here goes to the non ethical investment option.

This is where you really need to understand how important ethics are to your investments and if you will forgo returns so you know it invests your money in your values. 

How important is ethical investing to you?

Going back to the start of this article, ethical investing is all about finding what funds or products match the best with your values.

Your first step should be to identify what those values are.

Do you have non-negotiables that you need to include, like climate change or animal welfare? Are there certain industries you want to avoid, like oil or air travel?

It’s up to you to then do your research and see what the best match is.

Realise though that no investment product will be 100% aligned with your values. You will need to be flexible if you want to use these products.

Also, feel that you are making a difference or contributing to a movement. You are putting your money towards more responsible and ethical companies that are bringing positive change to the world.

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