Ethical Investing – What’s ethical about it?
21 September 2022
There is nothing I value more than honesty and transparency, so let’s be honest about the financial planning world. Like many other industries it is not immune to fads. The next ‘in’ thing, the whole ‘I want what he’s having’ feeling.
Some years back Self Managed Super Funds were that thing. I am not saying that I don’t recommend SMSFs, but they are designed for the right people at the right time. Setting up a Fund is not a good idea because your neighbour has one!
Looking back (and showing my age) agriculture was the thing. People flocked to invest in trees, many not having the faintest idea of the various risks involved. You might not want to hear the horror stories I have heard from that time!
So now all the hype seems to be around cryptocurrency and ethical investing. I am going to leave the Bitcoin conversation for another day and focus on ethical investments.
The Fine Print
This will not surprise my clients, but I do buy into the theory of investing ethically, yet I strongly encourage you to read the fine print.
I spoke to a gentleman yesterday from a high-end software company. Their software is essentially designed to tell you whether the ‘ethical’ investment you are considering is indeed ethical, using a sophisticated scoring system.
The process starts with understanding what ethical means to you. This is a conversation I have been having with my clients for years.
We work to find your purpose, the thing that drives you to invest ethically. Do you disagree with companies that invest in gambling, smoking or drinking? Are you concerned about the impact coal mining has on the environment? Do you want to be involved in businesses that are championing diversity and inclusion?
Once you have found your key motivating factors, it is time to see what investments are out there that will help you to feel as though you are investing to become part of the solution, not the problem.
The wild card that we are then forced to deal with is ‘green washing’. This is where the naming conventions used by investment managers are false or misleading.
This week the Australian Competition and Consumer Commission (ACCC) announced that they are actively targeting businesses that ‘undermine consumer trust and confidence in the market, by falsely promoting environmental or green credentials to capitalise on consumer preferences’. The ACCC are calling for reliable scientific reports and clear third-party evidence to prove that products that claim to be sustainable are. This will better protect the businesses that are investing millions into innovation in this space, as well as the consumers who are buying into these products.
The Next Step
So, you have found your reason to invest ethically, you have found a fund manager that is not distorting their green credentials and you are ready to invest.
Now it’s time to consider investment performance in this volatile market. If your ethical preferences are too restrictive, you may have to forgo returns in your quest to make a difference.
As you can see, ethical investing is not a short discussion, but it’s a worthwhile one to have.