Understanding Ethical Investing
Ethical investing, also known as socially responsible investing (SRI) or sustainable investing, involves selecting investments based on criteria that reflect the investor's values and ethical beliefs. These criteria may include environmental, social, and governance (ESG) factors, such as climate change, human rights, labor practices, and gender equality.
Benefits of Ethical Investing
1. Aligning Values with Investments
One of the primary benefits of ethical investing is the ability to align your investment portfolio with your personal values and beliefs. By selecting investments that support causes you care about, you can feel confident that your money is being used to make a positive impact in the world.
2. Long-Term Performance Potential
Contrary to the belief that ethical investing sacrifices financial returns, numerous studies have shown that companies with strong ESG practices tend to perform well over the long term. By integrating ESG factors into investment decisions, ethical investors may reduce their exposure to risks associated with poor environmental and social practices, potentially leading to more stable and sustainable returns.
3. Mitigating Risk
Ethical investing can also help mitigate certain types of risks. For example, companies with poor environmental practices may face regulatory fines or lawsuits, leading to financial losses for investors. By avoiding investments in such companies, ethical investors can reduce their exposure to these risks. However, it is important to note that ethical investments are often more susceptible to market volatility given that they are unable to be as diversified due to negative screening (see below).
4. Positive Impact on Society and the Environment
Perhaps the most compelling benefit of ethical investing is its potential to drive positive change in society and the environment. By directing capital towards companies that are committed to responsible business practices, ethical investors can contribute to efforts to address pressing global challenges, such as climate change, poverty, and inequality.
Strategies for Ethical Investing
1. ESG Integration
One approach to ethical investing is to incorporate ESG factors into the investment analysis process. This involves evaluating companies based on their performance across a range of ESG criteria and selecting those that meet certain ethical standards.
2. Negative Screening
Another common strategy is negative screening, where investors exclude certain industries or companies from their portfolios based on ethical concerns. For example, some ethical investors may avoid investing in companies involved in tobacco, alcohol, or weapons manufacturing.
3. Positive Screening
Positive screening involves actively seeking out investments that align with specific ethical criteria. For example, investors may look for companies that have strong commitments to environmental sustainability or social responsibility.
4. Impact Investing
Impact investing takes ethical investing a step further by actively seeking investments that generate measurable social or environmental impact, in addition to financial returns. This may involve investing in projects or companies that are addressing key social or environmental challenges, such as renewable energy or affordable housing.
Getting Started
If you would like to "put your money where your mouth is", it is easy to get started by:
Moving your superannuation into an 'ethical' investment option or switching super fund providers to one that caters for your specific ethical investment preferences.
Investing directly through ethical Exchange Traded Funds (ETFs) sold via online brokerage accounts or via managed fund platform providers.
If you need assistance with these decisions, reach out for an obligation free appointment today!
The purpose of this content is to provide general information only and is not personal financial advice.
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