Put your Money where your Heart is
With increased awareness about the effects of global warming and social injustices, people are more interested in what they can do to make a difference. Well, that’s not exactly right – the awareness was always there, the care-factor is new. People are much more vocal about their beliefs and more openly trying to influence the people in power to make legislation which can really affect change.
Many of my clients have asked about Ethical Investments over the years. This used to mean only companies who watch their carbon footprint or who avoid certain industries like gambling or pornography. These days, it’s a billion-dollar industry and there are options in most asset classes. If you’re after exposure to these investments, here’s some terms you’ll come across and some questions you can ask yourself to design a true Impactful portfolio.
Firstly, lets’ talk about the name – Ethical Investments. It speaks for itself but can also be misleading. It doesn’t just focus on companies with ‘good ethics or values’; there’s much more to it, so the name I really like is Impact Investments. A company or investment which truly makes an impact in the sector or the causes it is focused on.
First step to design an Impactful Portfolio is to focus on you. What are your Values and Beliefs? What causes are close to your heart? When I found an investment, which has an additional screening for gender diversity on board level, I was ecstatic. The empowerment of women is a cause very close to my heart and one I focus on in my financial planning services too. When I saw an opportunity to put my money where my heart is, I grabbed it! Where is your heart?
Write down some causes as a first step, then find companies or investments that focus on that. Here’s how you can review investments and what their true beliefs are:
Negative Screening – when I came across Ethical Investments for the first time, about 13 years ago, there were very few players readily available to Australian investors. The ones which did offer this, only did negative screening. By that, it means to exclude certain industries – gambling, arms, certain types of mining, pornography etc. The obvious “bad” things, any investor wanting ethical options would like to avoid.
But there’s more to it than that. Some investments may include these industries, provided the company doesn’t derive more than 5 or 10% of their total revenue from these sources. Check the product disclosure statement or the company’s Charter to determine their value statement. One of the fund managers who clarifies their Charter very well, is Alphinity – read it here.
A few investments go so far as to review the ‘supply chain’ as well – for example, they won’t include any companies whose services breach their policies, but they also won’t include any companies whose subsidiaries or main suppliers of services and products, engage in any of the activities on their exclusion list either. This is an excellent incentive for companies to know who their clients and suppliers are.
It all comes down to the Values you wrote down in Step 1 – if any of the investment’s decisions or underlying holdings breach your values, then this one isn’t for you. Choose investments, which makes decisions or compromises you can live with.
Positive Screening – this adds a layer of screening and the focus changes to companies making a difference. It involves investing in companies with a commitment to responsible business practices, that produce positive products and services or that address environmental or social challenges.
Personally, I appreciate investments which follow the UN’s Sustainable Development Goals (SDG’s), meaning that in our ever-changing world, their charter can evolve to adapt and make a true, lasting impact. The UN Sustainable Development Goals were adopted by all United Nations Member States in 2015 with the aim to achieve them by 2030. The SDG is a set of 17 goals, forming a shared blueprint for peace and prosperity, for people and the planet. They recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.
When you have an idea of what type of investments you’d like to include in your portfolio and have learnt more about the options available, take a look at your structure for investment. Through Super you can access Ethical Investment Options through a range of super providers, including using Retail, Industry and Corporate Super Funds. A Wrap style fund also gives access to a wide range of Managed Funds, ETF’s and direct shares who have an Ethical or Impact Bias. Wrap funds are also available for Non-Super Investments and a good direct share broker will be able to assist with companies that align with your chosen values.
And lastly, another thing to look out for when choosing an Impact investment, is of course cost and returns – although we’re trying to make a difference in the world, investing our own money (and sometimes our retirement monies) means that we’re in it to grow it, not to run a charity. This means that cost effective investment fees are important and that you’re also looking for funds and fund managers who will give you a good return on your investment. Many of the Ethical funds in Australia are index (or passively managed) they tend to be lower in fees than an actively managed fund. They are also available as ETF’s, making them cheaper than a managed fund. Canstar released an article in August with the Top 10 Best performing Ethical Investment Funds – the results are quite interesting and shows that, when you choose the right fund, the benefits of investing in Impact Funds, can make a difference to your bottom line too.
In summary, you can find an ethical investment option that reflects your own values, supporting a cause you believe in. It all comes down to choosing the right investment or fund manager, so consider getting professional advice if you’re unsure. Putting your money where your heart is, is possible when you have the right adviser in your corner.