Ethical investing encourages people to consider factors other than profit when deciding where their money is invested.
Environmental, Social and Governance, or ESG, refers to the three main factors in measuring the sustainability and societal impact of an investment.
This broad category of investing includes strategies to exclude or limit investment in certain industries such as fossil fuels, while encouraging further investment into sustainable industries like renewable energy.
The great hope for ethical investment is that by allocating capital away from harmful industries and towards sustainable industries, it will in itself be a force for creating meaningful change.
According to the Responsible Investment Association of Australasia, 44 per cent of professionally managed funds in Australia in December 2018 had some kind of ESG framework around them.
This represented about $980 billion of the $2.24 trillion invested in Australia and was almost double the amount invested in ESG in December 2015.
BDO Private Wealth Director Lachlan Kennett said that there is a growing demand from investors to ensure that they are invested in a way that meets their personal set of ethics.
“These days with the amount of information around investments in general and also on factors like the environment and human rights, people are starting to combine the two,” Kennett said.
Kennett said consumer-led ESG usually involved screening out unwanted industries such as fossil fuels and companies with poor human rights practices.
He said impact investing, which involves investing for a return while also getting a tangible ESG outcome, grew in popularity by 79 per cent between 2018 and 2019.
“There’s a growing amount of evidence that says you’re not giving up a massive amount of return by investing sustainably,” Kennett said.
“It is becoming increasingly popular and from my side we are seeing a lot more resources becoming available to us both in research – being able to find out the ESG ratings on various companies and funds – and also there’s a lot more products out there designed specifically for this style of investor.”
There are a range of different options for people wanting to explore ESG investments with many superannuation funds now offering sustainable or ESG targeted funds.
Kennett said he expected ethical investing to continue to increase in popularity with investors and fund managers.
“We’re already seeing a number of industry funds take up ESG practices across the board and a big increase in fund managers developing ‘ethical’ options as there is a lot of pressure coming through from the consumer,” he said.
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