Ethical investing has moved a long way from its origins as a niche concern for a small number of values-driven investors. Ethical funds are sometimes called sustainable or responsible investments, and the sector has grown into a mainstream part of how Australians invest. According to the Responsible Investment Benchmark Report Australia 2024, the Australian responsible investment market reached $1.6 trillion in 2023, a scale that would have been hard to imagine a decade ago.
Today’s consumers are increasingly demanding to know if their morning coffee is ‘fair trade’, their crispy-skinned fish is sustainably caught, and if their home can be run more efficiently on solar power. So it’s not surprising that many consumers are also choosing to align their ethics with their money.
But when it comes to investing your hard-earned cash, the feel-good factor is not enough. In order to achieve your long-term financial goals, you need to earn the best possible return on your money.
What’s Changed in Ethical Investing Since 2020?
The biggest shift isn’t just the size of the sector. It’s who is driving it. Ethical investing used to be a specialist corner of the market, chosen by investors willing to accept a possible trade-off in returns for their values. That trade-off no longer defines the conversation. Environmental, social and governance (ESG) considerations are now built into mainstream investment analysis by many of Australia’s largest asset managers, not layered on as an afterthought, and the performance data has caught up with the growth in assets.
Many Happy Returns
The numbers support the case for ethical investing on financial grounds, not just values grounds. Per the Responsible Investment Association Australasia’s (RIAA) 2024 benchmark data, RIAA-certified responsible growth funds delivered average returns of 10.57% over five years and 13.32% over ten years, compared with 8.98% and 9.10% for mainstream comparison funds over the same periods.
Of course, past returns can’t be relied on to predict future performance. But the figures do support the notion that it’s possible to invest responsibly without sacrificing returns.
What Is an Ethical Investment?
The definition of ethical comes down to your personal values and can be as broad or narrow as you want it to be. You may want to support the development of renewable energy, while others might want to limit the spread of poker machines. Or you may want mainstream fund managers to encourage high standards of corporate governance from the companies they invest in.
Here is a summary of investment styles on offer:
- ESG integration: includes environmental, social and governance factors in financial analysis and investment decision-making by fund managers, in the belief that these factors drive returns and reduce risk.
- Impact investing: targets investments aimed at social or environmental issues while creating positive returns for investors.
- Negative screening: excludes specific industries, sectors, companies, practices or countries that don’t align with ethical goals. Common exclusions are gaming, alcohol, tobacco, weapons and animal testing.
- Positive screening: selects investments with positive ESG or sustainability performance relative to industry peers. Sometimes called best-in-class screening.
- Sustainability: targets investments in areas such as clean energy, green technology, sustainable agriculture and forestry, green property or water technology.
Investing for the Long Term
It’s not just consumers who are driving ethical investing. Professional investment managers have increasingly incorporated ESG practices into their mainstream investment products, and they are doing so for hard-headed financial reasons rather than sentiment. A good ESG rating can be an indicator that a company is thinking seriously about the long term, which makes ESG-conscious companies a reasonable fit for long-term investors and superannuation funds. Most of Australia’s largest asset managers now have broad ethical principles built into how they invest, not held separately as a specialist product line.
How Can I Invest Ethically?
The simplest way to put your money where your values lie is to select an ethical managed fund or investment option, either inside or outside super. This will provide a diversified portfolio of investments even if you have only a relatively small sum to invest.
Ethical investing has come a long way from a standing start in the 1990s. If you would like to include an ethical component in your investment portfolio, explore our investment management approach or speak with our team.
This article contains general information only and does not constitute personal financial advice. Your circumstances are unique. Speak to a qualified adviser before making financial decisions.
