If you’ve never looked into ethical investing, now is the time to start – the sector has grown by 76% over the past three years, and doesn’t look like slowing down. We’ve partnered with Verve Super to answer two of the most common ethical investing questions: how does it work, and what is the real impact of ethical investing?
If you care about creating positive change, getting started as an ethical investor is easier than you think.
How does ethical investing work?
The basic principle of ethical investing is that you can create positive change in the world while still reaping financial rewards. It is a rejection of the idea that the only way to make money is sticking to outdated, harmful business models built on exploitation.
First, a very short primer on investing:
When you invest in a company, you buy a ‘share’ in the ownership of that company. For companies listed on ASX, the value of the company is determined by the share price. Changes in the share price are largely impacted by the supply and demand for those shares. If you’ve brought shares and the demand for those shares increase, the price will also increase. You’ll be able to cash in on that increase if you choose to sell. However, if the price of the share drops lower than what you’ve paid, and you choose to sell the shares, you could lose money overall. Alternatively, if you decide to hold onto the shares, overtime you’ll receive dividends (money paid to shareholders from the profits of a company) and the better a company performs the more likely you’ll be to receive higher dividends.
When you buy shares in a company, you want it to succeed. So, ethical investing focuses on buying and selling shares in businesses that are dedicated to doing good, in areas we think there will be financial growth.
If you have super, you’re investing… but maybe not ethically
You might not be actively trading shares, but here’s the thing: if you are a member of a superannuation fund, you technically do have investments.
Super funds use your super to invest in shares on your behalf. Your employer contributions + any personal contributions + the returns on the investment of your super – fees = how much you’ll get when you retire. But because your super fund often picks your investments for you, most people don’t know what their money is being invested in – and therefore, what businesses or industries are growing from your investment.
This means every Aussie with a super fund can be an ethical investor by choosing an ethical super fund. This is one of the easiest ways to participate in ethical investing. It ensures your money is not being used to build fossil fuel companies, tobacco companies or gambling companies.
However, there is still variation in the types of ethical super funds. For example, Verve Super uses both a ‘positive screen’ to invest in companies doing social and environmental good; and a ‘negative screen’ to rule out investing in destructive industries like fossil fuels, detention centres, live animal exports, gambling, and more.
Ethical funds like Verve also tend to be more transparent about what they invest in – something that’s been an issue for the whole superannuation sector. For example, super funds that invest in coal-fired power plants could be at odds with the limited financial future of the fossil fuel industry. On the other hand, Verve invests in renewables and lists every company it invests in. It’s a win for both ethics andprofit.
The more transparent your super fund is about where it invests your money, the more control you have over the type of future your money is helping create.
What is the impact of ethical investing?
Critics of ethical investing argue that a) it doesn’t make money for investors, and b) that divesting funds away from harmful industries doesn’t actually hurt those companies or industries. So, what is the true impact of ethical investing?
Ethical investing generates better returns
On the individual level ethical investing does make money for its investors. In fact, according to the 2020 annual benchmark report by the independent Responsible Investment Association of Australasia (RIAA), ethical investments consistently outperformed mainstream competitors. It means you can sleep easy at night knowing your super is being used to create a future you actually want to retire in without having to compromise competitive financial performance.
But when it comes to the bigger impact, the answer is more complex.
Divesting money is symbolic
While divesting and diverting money away from industries like tobacco, fossil fuels, and guns may not necessarily have an immediate financial impact it does hold symbolic power.
Depending on the purpose of divestment, it can indicate that consumer sentiment is changing or that political action may be on the horizon. This can make it harder for companies to access investor capital, attract talent and/or establish commercially beneficial partnerships (often because their reputation is at risk by association).
Investing speeds up progress
However, the impact of ethical investing comes from the businesses we choose to invest in. It directly increases their access to financial capital and helps the company grow. By focusing your money towards positive change, we can achieve progress much faster.
Case in point: $4.3 billion was invested in Australia’s renewable energy sector in 2019, which saw the construction of 34 large-scale projects. Ethical super funds are helping us reach a more sustainable future, faster.
How should you choose an ethical fund?
Good news: there is a growing range of options for ethical investments and super funds for you to choose from! These are the two biggest factors to keep in mind when deciding where to put your money:
- What does ‘ethical’ mean to you?
All super funds will define ‘ethical’ differently. For example, for most people fossil fuels are an obvious no-no. But for those who also believe in advocating for women, Verve does not invest in any company that refuses to put a woman on the board. Any potential investment has to meet both environmental and social standards before Verve will invest. Do thorough research and check that the super fund you are considering truly aligns with your values. - Look for investment transparency
Transparency and ethics go hand-in-hand, so look for super funds that publish a full list of all their holdings. You can also find out which super funds are blocking positive action on climate change by visiting Market Forces. - Check fees and performance
Ask for these details to make sure you’re comfortable with them. As with any financial product, high fees will eat into your money, but having the lowest fee possible won’t matter if the overall performance is poor. Likewise, checking out a fund’s performance is a good place to start, but remember, past performance is not an indicator of future performance.
DISCLAIMER: Information provided is of a general nature only. It’s important to do your own research and consider things like fees, investment performance, insurance cover, your risk profile, and Verve’s alignment with your values, when considering if Verve Super is appropriate for you.
Learn more about Verve Super here.
