Is it Possible to Invest Ethically?
Any possible act has many sides to it which are relevant to its rightness or wrongness — Sir David Ross
It is a difficult question to ask yourself currently— how can I be better than I was yesterday? Especially, when each action you take may have many unknown consequences — I just found out Pringles cans aren’t recyclable…
Where do you begin?
In our attempt at improving a little each day, why not start with the known consequences of our actions. And one of the most simple and effective actions you can take is that of where you direct your money.
Being more assertive and conscious of the movement of your money is both an empowering and freeing concept. Now more than ever, we can demand change and choose where our money is invested — although the choice is not free of dilemma, for what may be considered ethical in one's eyes is abhorrent in another’s.
However, the benefits of considering our money’s impact and enduring the mental inertia to truly dissect our ethics outweigh the long-term costs of avoidance, and perhaps it is our duty to make this world a little bit better for having lived in it.
Before we begin: do you feel fossil fuels are detrimental to the environment, and if so, are you comfortable saving a dollar in a bank that then uses that dollar to subsidize the producers of said fuel?
How about mass testing on animals in our attempts at finding the most efficient Covid cure? You may not be comfortable investing in Pfizer directly, but your bank most definitely does; indeed, the cure may even save your grandmother’s life.
These are but a few of the questions you will have to consider in where to place your money.
What are my ethics?
Do you think the standard of all morality is the result, or end goal, of all the cumulative actions required to get there?
Example: In our search for the cure to Covid, mass testing has been carried out on thousands of animals. Whilst you don’t wish harm to any animals, you understand it is a necessary requirement to save millions of lives.
Or do you feel that the standard of morality is derived from the action itself regardless of the outcome?
Example: I would never lie even it meant the death of another.
These are examples of teleological and deontological ethics respectively and are grouped under a system of ethics known as normative theories. There are more theories under this umbrella such as ethical egoism, the theory that one has the obligation to act in accordance with preserving or advancing their own self-interest, without the requirement to promote anyone else’s.
But whilst not trying to educate on the branches of ethical systems, it is useful for us all to understand whereabouts we fit within these systems as they ultimately tailor our choices. Understanding ethics will lead you to make more informed decisions in the long run, whilst also considering perspectives you may not have conceived of before.
What is Ethical Investing?
Ethical investing is what you make of it — it is the practice of using personal ethical standards and principles as a yardstick for the selection of your investments.
Ethical investing has been around for some time but under different guises. For instance, a Sharia-Compliant fund is a type of asset that is governed by Sharia Law and Islamic religion; the fund will exclude investing in companies that derive their income from pork products, alcohol, gambling, and others.
However, in the last couple of years, there has been a trending rise in Ethical Investing, mainly due to changing social views and greater transparency on environmental issues. It is this rise that is likely the result of your piqued interest.
With this rise of greater global accountability and thus greater demand, many fund managers have expanded their horizons to capture this segment of the market. Ethical Investing could be as simple as investing a portion of your income into a fund headlined with the acronym ESG (Environmental, Social, and Governance), whereby companies are scored according to their impact on the three criteria:
- Environmental: A companies impact on the climate, such as how effectively it manages waste and water, and its policies to reduce its carbon footprint.
- Social: How companies treat their staff and communities with regard to human rights; and consider the privacy, health, and safety of all their stakeholders.
- Governance: How a company manages its business through its board and executives, whilst maintaining compliance with legislation and its regulators.
In essence, a fund is a collective of many different companies that can help you diversify your portfolio; whereby, an ESG fund will strike out companies that don’t score above certain criteria, compared to a fund that tracks the entire market.
Unfortunately, Ethical Investing is not that simple… If you want to make an informed decision you will have to look beyond the ESG label and look into how the fund scores its criteria for exclusion:
The Ethical Dilemma
ESG ratings help investors identify companies that are leading or lagging within their industry, which may flag opportunties or risks not captured by conventional financial analysis.
As featured below, different funds can focus on different metrics in order to meet certain requirements.
The dilemma is though you may condone the business practices in Tesla and Microsoft, would you consider the practices of Google, Apple, and Johnson & Johnson ethical? This is the issue you face when considering investing in an ESG labeled fund.
Many investment firms market, perhaps even “greenwash”, funds they are offering as sustainable and climate leading, but in truth, when you dig into the depths of where your money is allocated, it might not be with companies you stand behind.
If you are just starting out, these are a few things you might want to consider:
- Research into a fund's holdings (as pictured above); though presented as a climate-friendly fund, it may still have shares in fossil fuel companies who have simply scored higher due to a set of subjective ratings and thus entered the benchmark.
- Enquire into the fees of the fund; ESG funds, currently, are a little more expensive sitting at around 0.20%, compared to other index funds at 0.12%. It may not sound like much but a rough projected forecast over a 10 year period between the two fees (assuming a growth rate of 7% and inflation remaining the same) shows a stark difference:
3. Consider the dilemma of saving into a bank that uses your money to finance entities or individuals that are not considered sustainable or ethical. There are banks out there that offer current easy access accounts that may meet your standards, such as Triodos Bank in the UK and EU, and Bank Australia or Teachers Mutual Bank in Australia.
4. Seek out fund managers that were established on the principles of ethical investing such as Australian Ethical Ltd (Australia), or Planet First Partners (UK). These managers prioritize transparency so that you can have more choice in where your funds are directed.
Every dollar plays a part
The rise in ESG funds is due to the pressure and demand from individuals hoping to make the world a better place whilst also securing their financial future. With more conscientious investing, we support the companies doing their part, and restrict the power of those that fall behind. In a rough sense, with less money fueling companies that don’t meet the threshold, we improve the state of our world, and its inhabitants, one step at a time; whilst similarly demanding more accountability from existing and new entrants to the economy.
It’s time for you to think deeply about what you stand for and what kind of world you’d hope to see — for we are accountable for each and every dollar that is spent on making a difference, or not.
As with all investing your capital is at risk and you may lose some or all of your original investing.