Looking to invest ethically? There’s a lot to think about

If you’re considering investing your money or your super in line with your values, you’re certainly not alone. A growing number of Australians want their investment to reflect what matters to them, and the marketplace is responding with “socially aware”, “responsible”, “sustainable” or “ethical” options. But with so many choices and claims out there, how can you tell if a company or super fund's strategy genuinely lives up to what they're promising?

Understanding ESG

When researching ethical investments, you’ll often come across the abbreviation “ESG”. ESG means “environmental, social and governance”, but different funds and companies may define ESG differently, and the term can cover a wide range of factors:

• Environmental: this might include pollution control, biodiversity protection, carbon emissions reduction, or sustainable agriculture;
• Social: this could encompass gambling exclusions, labour standards, diversity and inclusion, human rights, or military contracting policies;
• Governance: often covers board diversity, business ethics, whistleblower protection schemes and anti-bribery and corruption measures.

Because ESG can mean different things to different organisations, you’ll need to very carefully examine each fund’s investment strategy and product descriptions to understand the claims they are making and how their business practices align with those claims.

Key considerations when choosing ethical investments

Think hard about what you personally want to achieve with your investments. What ESG factors are most important to you? How much weight do you want to give those factors? This will give you a solid foundation to work from when you’re comparing different products. When reviewing your options, pay close attention to the following:

• ESG claims: Look for clear, specific claims rather than vague, overarching statements. Does the fund or company have a plan to achieve their ESG or sustainability goals? How will progress be measured? Check company reports, market announcements or their website for information.
• Clear definitions: Be wary of vague terms like “green”, “eco-friendly”, “zero emissions” or “carbon neutral” without supporting details. Do you understand the ESG or sustainability-related terms the fund or company are using? Are they backed up with evidence?
• Product labels: Look at the description of the investment product or option and check if it matches your understanding.
• Investment strategy details: Every fund operates differently. Some funds may exclude products that don’t meet certain ESG criteria (negative screening) or seek products that do meet a set ESG criteria (positive screening). Look for clear and detailed information about revenue thresholds, investment selection methodology, and which sectors or themes the investments are focused on.
• Fees: Higher fees may be charged for management of ESG investments when compared to traditional options, so make sure you understand the full fee structure.

Beware of “greenwashing”

You may have heard about “greenwashing” in the news. Greenwashing (or greenhushing) describes false or misleading claims made by companies or products to make them seem more environmentally friendly, sustainable or ethical than they are. Sometimes, information about specific investments that don’t align with the expectations of ethically minded investors might also be omitted or obscured. An example of this might be a super fund that actively promotes a “socially aware” option that avoids investment in tobacco products, but invests in companies that earn revenue from tobacco products while not publicising this in its investment strategy.

Australian regulators are taking greenwashing seriously. ASIC and the ACCC (Australian Competition and Consumer Commission) have taken action against greenwashing misconduct. Enforcement actions have resulted in significant penalties, including $10.5 million against Active Super and $12.9 million against Vanguard Investments. 

Information for consumers about ESG investing and how to spot potential greenwashing can be found on the Moneysmart, ACCC and ASIC websites. Financial advisers and responsible investment organisations can also help you match investment products to your specific values and financial goals.

Source: https://moneysmart.gov.au/how-to-invest/environmental-social-governance-esg-investing 
www.asic.gov.au/about-asic/news-centre/inside-asic-podcast/#series2-episode3 
www.accc.gov.au/business/advertising-and-promotions/environmental-and-sustainability-claims