Ethical investing in global equities
- Fri 03 September 2021
Why doing good for the planet is also doing good for your portfolio.
Even before the pandemic wreaked its havoc on the world, the strong tailwinds behind ethical investing were sidelining any remaining sceptics.
Consumers who had long been making sustainable decisions around food and fashion were starting to connect these values to their money, and green finance was growing at an accelerating pace.
But the devastating impact of the pandemic has made people even more socially conscious, with 58 percent [1] of consumers being more mindful of their impact on the environment since Covid.
Ethical investing may have gone into the pandemic with a full head of steam, but its dramatic growth since then has vanquished any lingering scepticism.
Returns
The deeply entrenched view that ethical investing sacrifices returns has been well and truly debunked, supported by research that shows responsible-investment Australian share funds outperformed mainstream Australian share-fund benchmarks for 1, 3, 5, and 10 years. [2]
This is powerful evidence. After all, who doesn’t want to make more money while also doing good?
Ethical investors have also begun to reshape companies’ relationships with their shareholders by demanding companies show the value they create beyond financial returns. [3]
As such, we’re witnessing a noticeable shift in corporate behaviour with a proliferation of net-zero emissions pledges and an increasing focus on the E and S in ESG (Environment, Social and Governance) as companies demonstrate they are about more than just profit.
But the most recent report from the Intergovernmental Panel on Climate Change (IPCC) looks set to push sustainability up the corporate agenda even further.
The report, dubbed a “code red for humanity” by the United Nations, provides a stark warning about the huge price of failing to address the climate crisis. Recent climate pledges and commitments must now be accelerated, but how can investors respond?
Faced with the scale of the challenge ahead, there is a clear role for ethical investors to push for mandatory climate action plans in the urgent transition to a low-carbon economy.
Ethical investing isn’t just for Australian shares
Ethical investing isn’t merely a style or risk factor, it’s a philosophy. It consequently doesn’t make sense to apply it to one or two asset classes. If the intention is genuine, it should permeate every investment decision.
For investors who want to make a difference, investing responsibly needs to be applied to the whole global equity market, not just to a small local market.
It has almost become incumbent on those with influence to wield that influence for the benefit of everyone. And with the investment industry forecast to become larger than the whole global economy, its influence could be a game-changer as what was once an option to invest responsibly becomes an obligation if we are to avoid deepening irreversible changes to our world.
Beware of greenwash
Faced with complex ethical issues, many investors opt for guidance from ethical investment managers. For example, does an oil company still count as ethical if it has robust environmental initiatives, or would you rule out investments in oil entirely? How do you form a view?
Such complex issues require thorough research and analysis. You would expect this to occur at the fundamental investment-analysis level, so why not ethical research? The task of assessing whether an investment meets our ethical criteria can be divided into two:
- the products or services the company produces
- how the company runs its affairs
To do this properly, investors need to rigorously analyse how individual companies’ business activities are aligned with the impact they would like to achieve from their investments; and then they must examine how these companies approach their own sustainability targets to get a sense of how they do business.
However, in the rush to capitalise on the move towards responsible investing, many companies, investment managers, and superannuation funds have been talking up their green credentials to attract investment. Where the claims aren’t substantiated, this is known as greenwashing.
Understandably, investors are concerned by greenwash. To avoid it, investors must dig deeper into investments to vet those that are genuine.
Think big or stay home
At this turning point in history, how can Australian investors respond?
To start with, they can divest from companies making problems worse and invest in companies and sectors that are part of the solution, encouraging their growth and benefiting from their success through their allocation of capital.
By widening their ethical approach to include global equities and other asset classes, Australians can put their money to work on global issues while also accessing the emerging trends and technologies that will help us solve the world’s biggest ethical dilemmas.
Many of the possible solutions to the world’s biggest ethical issues are found overseas. Diversification across regions and countries makes sense not just from an investment perspective but also from exposing investors to differing views on possible solutions and different paths.
Consistent ethical approach
Australian Ethical invests ethically across all its products and has been doing so for more than 30 years. That means we apply the same deep ethical consideration to each portfolio and asset class. We do our own research, looking from the bottom up at what companies and assets are doing and the impact they’re making.
Our ethics lead us to exclude investments not aligned with our vision of a sustainable, equitable future. Instead, our more holistic approach uses all the principles of our Ethical Charter to seek out companies and assets making a positive impact and avoid those that don’t. We believe it’s not enough to eliminate companies from a broader index to be left with “no harm done” or “best-in-class” portfolios.
The IPCC report makes two things clear – the first is that doing better in relative terms is only doing less bad, which is not good enough, and the second is that we have no time to lose.
By applying an ethical approach to their entire portfolio, Australian investors have an opportunity to invest in solutions to the world's most critical sustainability challenges and do good in absolute terms.
[1] https://www.mastercard.com/news/media/qdvnaedh/consumer-attitudes-to-the-environment-2021.pdf
About the author
More Investor Update articles
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
