Is Ethical Investing a Thing, or Are We Just Trying to Feel Better About Ourselves?

Ethical investing

One growing trend in investing is shrugging off the profit-at-any-cost mindset, and choosing instead to invest in supporting people and the planet — which, in fact, can still deliver healthy returns. But it’s not as straightforward as it seems.

But first, what exactly is ethical investing? According to Philip Jacob, founder of Super Obvious — an app that’ll help you ethically invest — ethical investing is investing in great companies that align with your values and don’t harm the planet in the process.

Jacob says the biggest misconception about ethical investing is thinking you’re financially compromising by doing so. “A lot of people think ‘Oh, it’s too expensive’ or ‘Oh, the returns aren’t as good’,” says Jacob. “The great thing about this fast-growing space is that that isn’t the case anymore. Ethical investing doesn’t have to mean compromising on returns.”

As for the recent uptick in ethical investing, Jacob credits it to transparency being key in today’s society. He encourages anyone investing to look a little deeper into the values of the companies they’re investing in to ensure they align with their own.

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“Impact starts at home and little decisions that people make with their financial choices can have an enormous trickle-down effect on the society we live in,” he says.

While Super Obvious app, and others like it, aim to make the process of ethical investing easy, you can also go about it on your own. As with all financial matters, though, a solid plan and a good understanding of what you’re getting into is crucial.

“When it comes to ethical investing, the devil is very much in the detail,” says Helen Baker, an Australian financial adviser and the author of On Your Own Two Feet: The Essential Guide to Financial Independence for all Women.

Ahead, Baker shares a few things to consider when ethically investing.

Determine What ‘Ethical’ Means to You

What is deemed as ‘ethical’ can mean different things to different people, so before you start, it’s important you figure out what it means to you.

Baker notes the term ‘ESG investing’, which stands for environmental, social and governance. This covers environmental impact reduction and sustainability initiatives; fair trade practices over supply chains and programs supporting customers and communities; as well as corporate governance that promotes diversity, equal opportunity and anti-corruption.

“[For a company] to follow ESG investing means ensuring all three criteria are satisfied,” she says. “However, you may value one more highly than the others or have additional criteria to satisfy — so consider your own definition of what it means to be ethical and tailor your investment strategy accordingly.”

Don’t Fall for the Hype

If you believed all the marketing and ads we’re exposed to every day day, you’d think virtually every organisation cares about us and our planet. So, what to do?  “Look deeper than slogans to see where your money actually goes,” Baker says.

She gives the example of biodegradable plastics, which sound great at face value — breaking down so they aren’t clogging our waterways and suffocating wildlife.

“Yet, in reality, biodegradable plastics generally break the materials down into microplastics — tiny particles that still pollute our environment and, frighteningly, can end up in our food chain,” she says. “Perhaps not the most ethical place to invest your money.”

Follow the Money Trail

Next up is looking at where the company’s money comes from — besides your investment, of course? To do this, Baker suggests following the money trail.

“Some people don’t like to support the gambling or tobacco industries, for instance, or fossil fuel extractors, even animal racing,” she says. “So, it pays to check whether your targeted investment raise funds from sources that don’t align with your values. Then look to what those funds are used for – and again, whether those uses align with your personal values.”

Consider the People Involved

Globalisation has opened up new growth markets, but also new opportunities for exploitation, says Baker.

“Where investments relate to products or materials, such as fashion, construction and manufacturing, ethical supply chains play a crucial role in supporting global workforces and rooting out corruption, slave labour and exploitation – especially of vulnerable women and children,” she says. “Not just in their own business, but their supply partners, too.”

Underpayment or so-called ‘wage theft’ is another prominent issue in business, whereby employers — whether deliberately, negligently or perhaps inadvertently — underpay their staff, Baker says. Over half a billion dollars in unpaid entitlements was recouped by the Fair Work Ombudsman last financial year alone — and that’s just in Australia.

So, if it’s shares or businesses you’re looking to invest in, consider their track record not just in profitability but in paying their suppliers and workforces a proper living wage.

Be Logical

Finally, while putting your money into ethical ventures is great, Baker says don’t forget that you’re investing and still need to generate financial returns, in order to grow your wealth and support your retirement.

“That means ensuring the numbers stack up and there is a solid business case for a particular investment, not just the emotional feel-good factor at supporting a good cause,” she says. “Because ethics and investing needn’t be mutually exclusive.”

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