How to invest ethically and save your conscience

So, you want to be a successful investor and want to save the planet at the same time and help to push progressive social causes.

The good news is that this is being increasingly possible, and – perhaps more importantly – profitable in today’s investment environment.

Over the last decade or so the idea of ethical investment – the so-called ESG approach (environmental, social and governance) – has gathered pace and is rapidly becoming part of the mainstream.

There is even talk that soon it will be so mainstream that it won’t even be a separate category, because virtually every superannuation fund and fund manager will be making investments through an ESG lens.

Part of the growth in ethical investment is not just because people want to do the right thing, but because the ethical funds often outperform the wider market.

On a global basis, data from Dow Jones found that of 200 ESG funds, 150 of them “outpaced the average return of a fund’s broader category” so far in 2020.

This was backed up by an analysis by global fund manger Fidelity International, which ranks US stocks according to an ESG assessment score.

As the market plunged in May due to the Covid-19 disruptions, stocks with the best ESG scores performed 4 percent better than the wider market, while stocks with the lowest ESG scores did 7 percent worse.

In Australia, demand for ethical investing is increasing rapidly. According to the Responsible Investment Association (RIAA), around $20 billion was invested in ESG based or “impact” funds as of December 2019, and according to Deakin University this could increase by more than $100 billion over the next five years.

Many people will be already investing in superannuation funds which use an ESG screen when they invest, so they may be ethical investors and not know about it.

For others, who are more active with their investments, there are a number of funds in the market which take this approach, and some of them are also listed on the sharemarket.

Earlier this month, for example, shares in Australian Ethical Investment surged by more than 5 percent after the company updated its earnings guidance due to better than expected returns in its Emerging Companies fund.

Because it is ASX listed, investors can hold shares in the fund manager itself or, if they choose, one of its funds. Shares in Australian Ethical Investment have come off the boil slightly in late July, but at $6.28 are well up from the year low of $2.02.

One problem for retail investors is that most of the major ESG funds are currently available only to wholesale investors, such as super funds, so individuals might only have an indirect investment through their super.

Some super funds, such as Future Super and its “for women, by women” sub-fund Verve Super, pitch exclusively to investors for whom ethics are the priority. Diversa Trustees also has a fund called Cruelty Super Free.

There are several Exchange Traded Funds (ETFs), from managers such as BetaShares, Vanguard, and Van Eck which take an ESG approach but they are “passive” funds, and simply mirror the performance of a basket of shares on the actual market.

AMP is also moving into ESG investing, and is set to add a sustainably focused investment option to its MyNorth wealth platform in an alliance with listed fund manager Pendal.

The two will launch an option without exposure to tobacco, gambling, pornography, thermal coal or “controversial weapons.”

Anyone wanting to go down the ethical investment route, of course, doesn’t necessarily need a fund manager to do so.

Anyone can adopt their own ESG approach and choose a portfolio of stocks which tick boxes for environmental and ethical responsibility.

Nothing is certain in the market, but the indications are that investors who do that are likely to see their portfolio outperform the market, delivering both peace of mind and profits.