A decade ago, ethical or ESG investing in Australia was still very niche.
Today, it's one of the fastest-growing sectors of the investment space and investors and fund managers alike are racing to get a slice of the pie.
What is ethical investing?
Ethical investing means different things to different people, but as a basic rule it is about aligning personal values with your money.
Investors who have an ethical focus will usually invest based on environmental, social and governance (ESG) criteria. For example, some investors might avoid supporting companies that have a negative impact on the environment, while others may feel more strongly about gambling, pornography or weapons production.
Based on these metrics, investors will either choose to invest in companies that align with their values (positive screening) or exclude those that do not align (negative screening). Some investors will do both positive and negative screening in order to invest ethically.
Ethical investing may also be called:
ESG investing
Sustainable investing
Impact investing
Responsible investing
What is "ESG" investing?
ESG investing is a type of ethical investing. ESG simply stands for environmental, social and governance.
Environmental factors are actions companies and governments make towards the planet. It includes things like greenhouse gas emissions, waste management and energy efficiency.
Social focuses on how companies impact society. This is more concerned with how the company treats its staff, its labour standards, supply chains and its stances on social issues such as child workers.
Governance focuses on the way the company is run. It is about rules and principles that define rights, responsibilities and expectations between stakeholders.
Is a company pumping pollutants into the air?
Does it add to the tonnes of plastic in the ocean?
Is it cutting down trees or planting new ones?
Are the employees happy and healthy?
Does the company have suppliers or partners that don't share your values?
What sorts of charities does it donate to?
Does it have transparent accounting?
Does it have a gender pay gap?
What is impact investing?
Impact investing is a type of ethical investing that focuses on selecting companies that are "doing the right thing". If you choose to impact invest, you will be buying shares in companies that make a positive social or environmental impact.
Impact investing isn't a new concept, but it had previously been confined to institutional and high-net-worth investors. Over the years, it has become more mainstream, with particularly younger investors looking to align their values and their investments.
How to invest ethically in Australia
To invest ethically, you'll need to figure out which companies or products align with your values. Unfortunately, few companies make this information easy to find.
It's not mandatory in Australia for businesses to publish information about their ESG practices, but most businesses that are doing the right thing look to highlight this. So if a company isn't transparent about their operations or business ties, that can be a red flag in itself.
To gain a measure of a company's ESG performance, investors can turn to the following sources:
Company reports and annual meetings
ESG rating agencies
News articles
Other third-party reports
A publicly listed company has to release full details of its operations twice a year – these are called earnings reports. 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 and get the opportunity to vote on key company decisions.
Finder survey: How important are ESG factors in where Australians choose to invest?
Response
Not important
47.51%
Somewhat important
43.63%
Very important
8.86%
Source: Finder survey by Pure Profile of 1004 Australians, December 2023
ESG screening
There are 2 main approaches to ethical investing – these are positive and negative screening.
Negative screening
Negative screening is the most common approach to ethical investing. It simply means an investor will exclude companies that fail certain ESG metrics.
This can vary from investor to investor and what you personally choose to negatively screen is completely up to you.
Tobacco
Gambling
Gas
Coal
Oil
Mining
Weapons
Military contracts
Controversial behaviours
Adult entertainment
Human rights abuses
Positive screening
Positive screening is also called impact investing. It's where you choose to invest in companies with 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.
Clean energy innovation
Sustainable products
Education
Strong inclusion processes for employees
Innovative technology
Health care
Aged care
Recycling
Energy efficiency
One way is to start by looking at the UN Sustainable Development goals. These 17 goals aim to address the key global challenges, including those related to poverty, inequality, climate, environmental degradation, prosperity and peace and justice.
Many impact investment funds now use these as a framework to measure a company's impact. Companies also use the Gates Foundation and World Health Organisation to inform their assessment of "impact".
ESG ratings in Australia
An ESG rating or score aims to measure a company's environmental, social and governance performance to help investors choose what they want to invest in.
There are several rating agencies in Australia that provide ESG scores for publicly listed 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.
Alternatively, some online trading platforms and websites offer screening tools to help investors identify certain traits in companies or avoid investing in companies that don't align with their values.
What is an ESG framework?
ESG frameworks are sets of guidelines that third-party organisations use to help companies manage their ESG commitments.
Basically, they provide directions on how to create ESG reports and how the business itself will share its ESG progress with the world.
How these organisations implement ESG strategies will differ, but they will all have similar goals such as reducing environmental impacts, lowering their carbon footprint or creating more robust working conditions for staff.
What are my other ESG investing options?
So far, this guide has focused on individual shares that investors can purchase but there are alternative ways to invest ethically.
For instance, there are many investment funds today that offer a whole portfolio of ethically screened stocks. This can be a much easier option than searching for this information yourself.
Ethical ETFs
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.
Ethical robo-advisors
Robo-advisors are investment platforms that typically recommend investment portfolios for you based on your personal goals, risk profile and other criteria.
As robo-advice continues to grow, it is creating specific niches for different investors' needs, with one being ethical-based portfolios.
Some robo-advisors with ethical portfolio options include Super Obvious, Stockspot and Bloom Impact.
Ethical super funds
An ethical super fund 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.
Notable examples include Australian Ethical Super, AustralianSuper – Socially Aware and Aware Super's Diversified Socially Responsible Investment fund.
Other than the obvious social benefits, there is also a compelling investment case for impact investment.
First and foremost, these are in growing areas. The world is looking to solve its issues including climate change. This will cost consumers and governments trillions.
But what is a cost for these groups is also an opportunity for businesses that are looking to solve these problems.
At the same time, these companies may be supported by regulation as policymakers seek to bring about change with legislation. These may be companies that recycle or generate power from renewable sources.
Going further, these companies may also be less likely to be involved in scandals or issues that can be detrimental to share prices.
Is Australia a good place to ethically invest?
Unfortunately, Australia is actually one of the worst places for ESG investing.
A report by The Investor Group on Climate Change (IGCC), the Asian Investor Group on Climate Change and Ceres that came out in late 2021 studied how climate policies of G20 nations work in terms of attracting investment.
In the case of Australia, we were rated pretty poorly. It found Australia’s current set-up is unlikely to attract climate-friendly investments.
Australia is also one of the worst emitters of greenhouse gas on a per-capita basis, with our reliance on coal electricity production and mining resources a major contributor.
However, more aggressive targets could change this.
Compare trading platforms to invest ethically
The following trading platforms offer either ESG investment portfolios or ESG screening tools to help you select stocks or ETFs based on your ethical criteria.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Pros and cons of ethical investing
Like any form of investing, there are pros and cons when it comes to choosing to ethically invest.
Pros of ethical investing
The pros of ethical investing are obvious:
Using your money for good. You can align your investing with what you believe in.
ESG is growing. ESG investing is getting more popular and as a result, good ESG companies are growing, too.
Performance.McKinsey research shows returns can greatly improve when ESG metrics are considered.
Challenges in ethical investing
While ethical investments can provide strong returns, these investments also throw up more challenges than traditional investments.
Here are 5 potential challenges with ESG investing:
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.
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.
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 ETF to an actively managed ethical fund. Overall, higher fees can significantly erode returns, hurting investors' longer-term outputs.
Limited options. By screening out companies you could remove winners from your portfolio.
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.
Is ethical investing worth it? Watch our 5-minute rundown
"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.
Frequently asked questions
The size of impact investing continues to grow year-on-year. If you take the figures released by the Global Impact Investing Network or GIIN, it is now worth more than US$1.16 trillion ($1.73 trillion).
Both ESG and impact investing are a type of ethical investing. ESG investors choose to include or exclude companies based on personal environmental, social or governance criteria. Impact investors seek to make a positive difference to society or the environment by specifically selecting companies that are making positive changes.
The 5 main approaches to ethical investing are ESG, impact, socially responsible, sustainable and moral.
Let's say you want to invest in the stock market but also want to avoid supporting companies that are major greenhouse gas emitters. Using an ESG stock screener, you could actively avoid investing in companies involved in coal manufacturing and mining. At the same time, you could seek out companies that are involved in renewable energy production.
Absolutely. By choosing not to invest in companies that don't meet your ethical criteria or seeking out companies that are making a positive impact, you are ethically investing.
Interactive Brokers is rated as the best online broker for penny stock trading thanks to its low fees for active trading, range of OTC stocks and technical analysis tools.
The best companies to invest ethically in will depend on your criteria. However, according to top ESG rating agency Sustainalytics, the ASX companies with the highest ESG scores for 2023 are Dexus (ASX:DXS) and Sydney Airport (ASX: SYD).
The following apps offer ESG screening tools:
SelfWealth
CMC Markets
Interactive Brokers
Westpac Online Investing
Some investment apps offer ethical portfolio options. These include:
eToro
Pearler
Douugh
CommSec Pocket
Spacehip
Raiz
Stockspot
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. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Cameron Micallef was a utilities writer for Finder. He previously worked on titles including Smart Property Investment, nestegg and Investor Daily, reporting across superannuation, property and investments. Cameron has a Bachelor of Communication and Media Studies/ Commerce from the University of Wollongong. Outside of work Cameron is passionate about all things sports and travel.
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"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.