Socially responsible investing – is it for you?

In recent years, ethical investing or socially responsible investing (SRI) has become increasingly popular. Driven by the growth in demand for businesses that are profitable and ethical, along with regulatory frameworks to address challenges such as climate change and modern slavery, there has never been a better time to gain exposure to ethical investments.

What are ethical investments?

Ethical investments provide exposure to companies with strong environmental, social and corporate governance (ESG) structures and practices. The Responsible Investment Association of Australia estimates there is almost $1 trillion invested in ethical companies and strategies across the country, equating to 44 per cent of the entire $2.24 trillion managed by professional investors in Australia.

Depending on your risk appetite, there is a range of ways you can invest ethically. You can put capital into an actively or passively managed fund with a focus on ethical investments. Your super fund may also offer investment options that focus on ethical leadership and business practices.

How to pick stocks in ethical companies

The research and analysis process for buying stock in ethical companies is broadly no different from regular stock picking. Analysing the typical indicators of financial strength is essential, including earnings per share, the price-to-earnings ratio and dividend yield. You will, however, need to weigh up whether a company’s approach to ESG aligns with your beliefs around important issues. These issues are typically environmental, societal, and political.

How to get into ethical investing

To get into ethical investing, you may place some of your capital into a responsible investment fund that uses ESG and ethics criteria, along with financial performance, to determine which companies are invested into. It’s important to note that the screening criteria for responsible investing are different from those used in strict ethical funds. As a comparison, strict ethical funds screen out specific industries such as energy, mining, gambling, pornography and narcotics as a default. ESG investment funds differ by focusing on stakeholder engagement and shareholder activism to influence change in companies instead of simply divesting or eliminating the option of investing in particular organisations in the first instance.

Whether you put your money in a fund or decide to pick individual stocks to get started in ethical investing, you need to determine what you’ll look for in potential investments. You may look for companies that are carbon-neutral or those that have initiatives such as planting a certain number of trees each year. There are also more detailed criteria such as the company’s approach to manufacturing which you may assess in your research. You may also choose to invest in funds that are financial vehicles and loan money to, or invest in, ethical businesses.

Do your research to diversify your investments

Similar to diversifying your portfolio with a range of asset classes, you also need to do your research and thoroughly analyse any potential investments that will provide exposure to ethical companies. To ensure you balance risk effectively, speak to your financial adviser to assess the specific ethical investments that are suitable for your unique situation.

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General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Paradigm Strategic Planning Pty Ltd is an Authorised Representative

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