Your how-to guide to ethical investing

Investors looking to align their morals with their money could turn to ethical investing.

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Ethical investing is a strategy where an investor makes their money in an ethical or socially responsible way.

Ethical investing means different things to different people, but as a basic rule it is aligning personal values with your money, for example some investors might be keen on sustainable energy. Others might want to simply exclude investments making a negative impact, like the coal industry. Investors who have an ethical focus will invest based on environmental, social and governance (ESG) criteria.

Based on these metrics, investors will choose companies that align with their values and exclude those that do not align based on these metrics.

ESG terms explained

Environmental criteria investors usually screen for energy use, waste, pollution, treatment of nature, resource conservation and treatment of animals.

Social is how the business works with its suppliers, charitable organisations, its community and how it treats its workforce.

Good governance goes a little further than simply avoiding controversy, with investors likely to want transparency on key issues including social and political stances.

Due to ethical investing "being the right thing to do", ESG investing is also known as:

  • Sustainable investing
  • Impact investing
  • Responsible investing
  • Socially responsible investing

But really the terms are interchangeable.

How to ESG invest

ESG investing is a combination of prioritising financial returns alongside a company's impact on the world.

Investors who choose ESG are looking at companies that behave ethically from an environmental, social and governance point of view.

In order to gain an accurate measure of a company's ESG performance, investors can usually look into 2 main sources:

1. Company reports
2. Third-party sources

A company has to release its full operations twice a year. This will allow investors to gain a snapshot of the business's operations.

Businesses will also host an annual general meeting (AGM). During this time, investors hear from the board of directors as well as engage with them.

It is not mandatory in Australia for businesses to comment on their ESG ratings when they are releasing reports or during an AGM, but most businesses that are doing the right thing look to highlight this. As a result, investors could gain a bit of information as to whether or not the business is following ESG practices.

While it's important that investors do their own research, looking into what the company is saying and what it's doing is a great place to start.

Secondly, there are a number of key resources that can help investors choose more ethically based companies.

In Australia organisations including the RIAA can help investors make more informed ESG decisions.

For overseas investments, MSCI ESG ratings and Sustainalytics ESG ratings can help investors.

How to ESG screen an investment

At its core, ethical screening goes beyond just the financial performance of a business. Instead, it focuses on what the company is doing and how it makes its money.

Screening is done in 2 ways:

Negative screening

Most commonly used by investors when picking individual shares, negative screening is actually the earliest method of socially responsible investing.

Negative screening simply means an investor will exclude companies that fail ESG metrics.

This can vary from investor to investor and what you personally choose to negatively screen is completely up to you. Most commonly, negative screening will exclude companies with poor environmental records or products that do societal harm such as gambling or tobacco.

Improvements in share analytics and reporting on ESG metrics have allowed investors to create greater insights when it comes to negative screening.

  • Tobacco
  • Gambling
  • Gas
  • Coal
  • Oil
  • Mining
  • Weapons
  • Military contracts
  • Controversial behaviours
  • Adult entertainment
  • Human rights abuses

Positive screening

On the flipside, positive screening is choosing investments with high ESG scores.

Investors who positively ESG screen believe they can gain strong returns by focusing on good environmental, social and governance practices. As such, these investors actively look for companies with a superior ESG record.

Whether that is notable work for the environment, strong social causes or good governance, positive screening involves rewarding "good" companies.

Both negative and positive screens are done relative to their peers, with the investor judging companies against their peers based on ESG characteristics.

Regardless of screening chosen, investors might focus on some or all aspects involved in ESG, such as:

  • Clean energy sustainable products
  • Education
  • Strong inclusion processes for employees
  • Innovative technology
  • Healthcare
  • Aged care
  • Recycling
  • Green products
  • Energy efficiency

Stock investing

One of the key ways to ESG invest is through individual stock picking.

Given ESG investing means different things to different people, the best way to gain control over what you buy is through picking your own stocks. This is because investors who choose to individually stock pick can have greater emphasis on what is important to them.

Most investments unfortunately will not cover all ESG metrics. So, investors who have a particular focus or passion might be better off choosing individual stocks.

If an investor is choosing to pick individual stocks themselves they should heavily research the company from both ESG and performance points of view.

For investors looking to purchase their own stocks, they can compare brokerage accounts below.

Comparison guide

Name Product Standard brokerage fee Inactivity fee Markets International
eToro (global stocks)
US$10 per month if there’s been no login for 12 months
Global shares, US shares, ETFs
Zero brokerage share trading on US, Hong Kong and European stocks with trades as low as $50.
Note: This broker offers CFDs which are volatile investment products and most clients lose money trading CFDs with this provider.
Join the world’s biggest social trading network when you trade stocks, commodities and currencies from the one account.
IG Share Trading
$50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares
$0 brokerage for US and global shares plus get an active trader discount of $5 commission on Australian shares.
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, plus get access to 24-hour customer support.
Superhero share trading
ASX shares, US shares
Earn up to 15,000 Qantas frequent flyer points when you transfer an exisiting balance or trade. Offer valid for all new and existing Superhero members until 28 February.
Pay zero brokerage on US stocks and all ETFs and just $5 (flat fee) to trade Australian shares from your mobile or desktop.
ThinkMarkets Share Trading
ASX shares
Limited-time offer: Get 10 free ASX trades ($0 brokerage) when you open a share trading account with ThinkMarkets before 31 December 2021(T&Cs apply). $8 flat fee brokerage for CHESS Sponsored ASX stocks (HIN ownership), plus free live stock price data on an easy to use mobile app.
Bell Direct Share Trading
ASX shares, mFunds, ETFs
Finder Exclusive: Get 5 free stock trades and unlimited ETF trades until 31 Dec 2021, when you join Bell Direct. T&Cs apply.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
Saxo Capital Markets (Classic account)
ASX shares, Global shares, ETFs
Access 19,000+ stocks on 40+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
CommSec Share Trading Account
$0 for ASX shares, US$25 for global
ASX shares, Global shares, Options trading, ETFs
Trade with Australia's largest online stockbroking firm.
Enjoy fast, simple and affordable trades, with market leading research and broker recommendations all in one platform
CMC Markets Invest
ASX shares, Global shares, mFunds, ETFs
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.
SelfWealth (Basic account)
ASX shares, US shares
Trade ASX and US shares for a flat fee of $9.50, regardless of the trade size.
New customers receive free access to Community Insights with SelfWealth Premium for the first 90 days. Follow other investors and benchmark your portfolio performance.

Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

ESG investment products

To find out what stocks could be ESG friendly, investors can use third-party data including MSCI or Sustainalytics.

According to the MSCI the top 5 US ESG stocks include Salesforce, Nvidia, Microsoft, Best Buy and Pool.

ESG investing comes in many forms and it purely depends on what the individual is looking to screen out. Also, an investor needs to understand that all businesses are not perfect and that they may need to trade off between certain ESG aspects. Take for example a business such as Tesla. While its clean technology may rank highly on the E in ESG, the company may fall in other areas such as safety and how it treats its staff.

A second consideration could be the olive companies – those that are emitters of fossil fuels today but are likely to be part of the green solution tomorrow.

​​How do you ethically screen the market?

John McMurdo, CEO and MD of Australian Ethical:

Picture not described"Every investment decision made at Australian Ethical is guided by an Ethical Charter that sets out our high-level principles and creates very clear investment parameters.

"Our in-house Ethics Research team then develops frameworks that contain a mix of quantitative and qualitative criteria to set out how the Charter principles will apply to any given industry or on a specific issue. These are updated as the world and our understanding of it changes.

"In developing these bespoke frameworks, we conduct deep research and analysis which includes data from multiple ESG providers, civil society, industry association reports, NGOs, CSIRO and science journals.

"We conduct consultations. Australian Ethical looks at international standards. We think about issues from different angles and grapple with contentious issues.

"Our investment team can then focus on getting the best returns from this investable universe, while also driving change through active company engagement. As a result, we have found ourselves organically specialising in areas such as healthcare, technology and renewables.

What are my other ESG options?

So far, this guide has focused on individual shares that investors can purchase through negative and positive screening but there are alternate ways to invest ethically.


If you're looking to invest in companies that align with your values but find individual shares overwhelming, you could try ethical exchange traded funds (ETFs) instead.

Australia has more than a dozen ethical-themed ETFs listed on the Australian Securities Exchange (ASX). Each of these follow their own set of ESG criteria.

Much like any other form of screening, ethical ETFs do different things. While some focus on sustainable practices, others prioritise social impact such as weapons, tobacco or gambling.

If you want to learn more about what are Australia's ethical ETFs see our separate guide.

Robo advice

For those who are unsure of what share or ETF to invest in, they could invest socially through robo-advisors.

Robo advice uses computer algorithms to build and manage an investment portfolio for you.

As robo advice continues to grow, it is creating specific niches for different investors' needs, with one being ethical-based portfolios.


With superannuation being one of, if not the largest asset you own, investors who are looking to make an impact can also move their superannuation to a more ethically based fund.

An ethical super fund is one that invests its members' money in an ethical or socially responsible way.

Again, ethical can mean different things to different people depending on your personal values, with superannuation funds following their own ethical guidelines. However, the majority will follow the same basic guidelines. They will purchase companies in sectors known to have a positive impact and exclude those that have a negative impact on society.

Notable examples include, Australian Ethical Super, AustralianSuper-Socially Aware and Aware Super's Diversified Socially Responsible Investment fund.

You can learn more about ethical super funds with our separate guide.

Pros and cons of ESG investing

Like any form of investing, there are pros and cons when it comes to choosing to invest in an ESG manner.

Pros of ethical investing

While returns can never be guaranteed and past performance is not indicative of future performance, studies have revealed ESG investors can get ahead despite the stereotypes of underperformance.

According to a Morningstar analysis of 745 sustainable funds against 4,150 traditional funds in 2020, sustainable funds actually outperformed.

The findings show ESG investing can actually outperform traditional investing. In fact, the average annual return for a sustainable fund investing in large global companies has been 6.9% a year, compared with traditional funds that have returned 6.3%.

A separate study by MSCI found portfolios that integrated ESG factors as well as financial analysis actually had lower risks and outperformed over time.

"Higher index concentration together with the higher average ESG index scores ('ESG scores') led to higher performance," the report said. "The two most concentrated indexes with the highest index-level ESG scores, the MSCI ACWI SRI and MSCI ACWI Focus Indexes, outperformed other ESG indexes. Lower concentration led to less pronounced ESG effect and a reduction in active returns."

Downsides to ESG investing

While ethical investments can provide strong returns, these investments also throw up more challenges than traditional investments.

Here are 5 potential dangers with ESG investing:

  1. Lack of universal standards. ESG and what an investor wants to exclude is a personal decision, meaning there is not a universal agreed-upon standard. This leads to inconsistencies when it comes to ESG portfolios and funds.
  2. Greenwashing. Companies currently self-report their sustainable data. This leads to issues including greenwashing where a business enhances its environmental impacts without delivering any real-world benefit.
  3. You may pay more in fees. Typically ethical investing comes with higher fees than competitors' standard mutual funds. This is especially true if you compare a passive exchange-traded fund to an actively managed ethical fund. Overall, higher fees can significantly erode returns, hurting investors' longer term outputs.
  4. Limited options. By screening out companies you could remove winners from your portfolio.
  5. Lack of potential. While investors might want to invest in products that have the most impact on society, they might not necessarily lead to greater returns. Even in a growing sector, say climate change, not all ideas or businesses will outperform, even if the sector as a whole does. Investing in ideas that have limited commercial potential might lead to poorer performance.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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