Keep your money clean

Occasionally, I get some interesting articles come across my desk with content that is relevant to the investment market. The following article by Melbourne-based financial advisers Pekada's Pete Pennicott is one such article:

More and more people are looking to invest in responsible investment funds everyday.

It used to be the exception. However, responsible and ethical investment has gained massive traction over the past few years and is expected to balloon even further in the near future. Now, a large proportion of people I talk to have an ethical bias that they would like to incorporate into their portfolios.

Realising this potential, Pekada, has revealed its top factors to heed when considering ethical investment.

The first and most important factor is doing your research – be aware of ESG (Environmental, Social, Governance) metrics, investment screening, and whether any underlying investments in prospective funds line up with your ethical views.

This is of significance because how you define ethics and sustainability may not be the same as how others define the same.

Investors should do their homework and read beyond the label.

There are so many different approaches, filters and types of ESG investment approaches that you need to know what you are investing in – much of the differences are qualitative and one person’s view of ESG can be very different to yours.

Secondly, deliberate where to begin. The easiest way to get involved is by buying into Managed Funds or Exchange Traded Funds, and more specifically, funds that are diversified across sustainable and ethical companies.

Another way is by buying into companies regarded as “ethical” on a public stock exchange. However, this would require some groundwork from you to determine whether the company you wish to invest meets your definition of “ethical”.

The ideal way to construct a portfolio taking into account your ESG preferences would be very similar to traditional portfolio construction with an added layer of research to apply your preferences. A mix of diversified funds and individual holdings across all asset classes is a solid foundation to upon.

The final factor is choosing whether to prioritise returns on investment or ethically sound investment decisions. A third option is to have a balance of both – although this may result in reduced expected return.

Applying the right screens to your investments so that you are invested in quality businesses which align with your values is a win-win. You get to be invested in businesses which you believe in and in doing so, build stronger conviction and a positive relationship to your investments. This helps to manage behavioural biases and ride out volatile periods in the market, avoiding the urge to panic sell.

Be mindful that choosing one alternative might not necessarily spell doom for the other, as reports have shown that mainstream funds have been consistently outperformed by responsible investment funds. This is in addition to benefiting the planet and peoples’ lives.

While investing ethically may seem like a great idea, the tricky part is about knowing where to start; especially in situations that combine sensitive facets like money and ethics.