Ethical Investing
What is ethical investing?
Growing interest in the effects of fossil fuels on the global climate is prompting investors to ask whether they can align their sustainability values with their financial objectives—and, if so, how. Concerns go beyond greenhouse gas emissions; many investors are also interested in issues such as land use, biodiversity, toxic spills, operational waste, and water management.
Just as you voice your sustainability preferences at the ballot box, you can also make a meaningful impact through personal participation in global capital markets.
However, a central question arises: how can investors reduce their portfolio’s environmental footprint without compromising their financial goals? In other words, how can you balance environmental responsibility with sound investment principles and strong financial performance?
One solution may lie in ethical funds. For years, individual investors have had the option to shift their investment strategy toward companies that adhere to defined ethical, socially responsible, and sustainable practices.
As we delve deeper into what it means to invest responsibly, ethically, or sustainably, a new vocabulary emerges. In this guide, we provide straightforward definitions of the most common terms you’ll encounter as you explore responsible investing options.
Responsible investing
The United Nations Principles for Responsible Investment (UNPRI) defines responsible investing as follows:
“The PRI defines responsible investment as a strategy and practice to incorporate environmental, social, and governance (ESG) factors in investment decisions and active ownership.”
While concise, this definition doesn't fully capture the broader implications of responsible investing. A responsible investment approach acknowledges the critical role ESG factors play—not only in the success of individual investments but also in building stable, well-governed social, environmental, and economic systems, which are essential for sustained investment returns. Many investors now recognize that both financial and non-financial value creation are essential, as they are interdependent.
Terms like sustainable and ethical investing are sometimes used interchangeably with responsible investing, though these concepts can mean different things to different people. However, responsible investing is widely accepted, with the UN’s Principles for Responsible Investment providing a global framework for integrating ESG issues into investment strategies.
United Nations Sustainable Development Goals (UNSDGS)
Beyond signing on to the UN Principles for Responsible Investment (UNPRI), many responsible investment products and strategies are designed to support progress toward the UN Sustainable Development Goals (SDGs). Established in 2015, the 17 SDGs aim to end poverty and injustice and protect our planet and its ecosystems, with specific targets set for 2030.
While the SDGs provide a roadmap for a fairer, more sustainable world, they lack dedicated funding. It is anticipated that governments, private companies, and investors will contribute to meeting these goals through their decisions and actions. In the investment sector, numerous opportunities allow investors to allocate capital toward private companies and assets that make meaningful contributions to one or more SDGs. This alignment with the SDGs is just one of several responsible investment themes integrated into investment strategies; others include low-carbon approaches, adherence to the Paris Climate Agreement, and compliance with other internationally recognized sustainability standards.
ESG
ESG is an acronym that stands for Environmental, Social and Governance. It is an umbrella term for the components of a responsible approach to investing. But as a term it is applied to a whole range of investment approaches and outcomes. So when someone describes a product as being managed or screened for ESG, this can mean many things.
The Responsible Investment Association of Australia (RIAA) provides an explainer to help you understand the different way that ESG screens, benchmarks and criteria might be used in responsible investment strategies and products.
Sustainable Finance
The goal of sustainable finance initiatives is to better align financial institutions and their activities to support better ESG outcomes. That means the activities and impacts for the whole value chain in the finance sector – lenders, borrowers, deposit holders, investors, insurers and more – need to be considered in the light of ESG criteria.
Green finance is a term sometimes used instead of sustainable finance, or to describe a sub-category that aligns specifically to better environmental outcomes.
Find out more about the Australian Sustainable Finance Initiative (ASFI)
Impact investing
Impact investing is quite different to applying ESG criteria to decide which assets to invest in. These investments are made to generate a measurable positive social and environmental impact as well as a financial return.
However, as with ESG, there are can also be many different measures of impact and types of impact. The Impact Management Project provides more information on some norms of impact management for companies and investors as well as a simplified measure of impact performance from an investor’s perspective.What is the screening process?
So who decides what's 'ethical'?
If you're considering ethical investment, look for a fund that's a member of the Responsible Investment Association Australasia (RIAA). The peak body created a certification program in partnership with the NSW Department of Environment and Conservation and the Victorian Government in 2005, with a view to making uniform standards of disclosure for funds. In order to qualify, fund managers must make a convincing case to the RIAA that they have a specific methodology in place to weed out unethical behaviour - the process is then independently verified by an accounting firm.
Where to get help?
Reach out to Westmount or a trusted Financial Planner or Advisor. We can help you sort through the myriad of ESG options out there to find the right path forward for you.
Interesting links…
United Nations Principles for Responsible Investment
Responsible Investment Association of Australia (RIAA)
Australian Sustainable Finance Initiative (ASFI)
The Impact Management Project (IMP)
Rick Maggi, Financial Advisor, Perth