Editor’s note: This article contains information only. It is not intended as general or personal advice. Your Money recommends seeking professional advice specific to your personal circumstances.
Ethical investing is taking off in Australia and investors have more options than ever before.
Funds labelled ‘ethical’ or ‘responsible’ have more than quadrupled in size over the past three years, according to the Responsible Investment Association Australasia (RIAA).
If investing in coal, ammunition or tobacco doesn’t sit well with you, how can you ensure your portfolio doesn’t stray into dangerous territory?
A panel of experts on Your Money’s Trading Day offered their top tips.
1. Find a provider with similar goals
As sustainable investing is becoming more popular, fund managers and investment product providers are releasing new products to attract this new type of investor, even if they have never produced anything for the ethical investing space before.
“We have got to make sure those companies are doing it for the right reasons and aren’t just trying to make money,” Tom Culver, CEO of ethical investment app Goodments, told Trading Day.
Understanding the goals of the company or provider is essential for ensuring your investment is a true reflection of what you want, advises Culver.
2. Search for the ‘sin threshold’
“There’s quite a lot of managers out there that say they won’t invest in something, for example weapons or tobacco,” said Culver.
“‘However they will have a rule in their fund which says they can actually make an investment in a company that earns less than 1% of their revenue from weapon manufacturing.”
As an investor you can decide what your own tolerance is for ‘sin’ revenue, and put your money in line with your ethics.
James Tayler of Morphic Asset Management encourages investors to ask direct questions about possible indirect investments or revenue streams that could bring about an ethical conflict.
“Ask for the documentation. Read their responsible investment policy if they have one, which they should do.”
3. Look for product certification
Tayler also encourages private investors to look for products that are certified.
The RIAA, the peak industry body for responsible investing, provides certifications to guide investors.
In order to receive a certification, companies and funds are required to provide more intense information about what they invest in than they are legally compelled to.
4. Ask fund managers to disclose their PRI rating
If you are looking more globally, the UN-backed Principles for Responsible Investments organisation gives fund managers a rating in order to increase transparency.
“That organisation is getting even more rigorous in holding [fund managers] accountable,” said Tayler.
”I would encourage investors to ask the question of potential fund managers: ‘show us your rating’.”
5. Don’t fall for all the good news
Coca-Cola Amatil announced that they will no longer be distributing and selling single-use plastic and straws in Australia.
Tayler makes the point that Australia is a reasonably small part of Coke’s global business, and investors should look beyond the headlines.
”I think there is a great deal of engagement going on that is good, but they still avoid some of the major issues, such as sugar,” Tayler said.
6. Start small and diversify
Just because you are investing sustainably does not mean you are investing without risk.
The rules about starting small and slowly in order to grow and diversify over time still apply.
In the hype of a growing investment sector, investors should not lose sight of the possibility of losing money, just as you could with any investment.
Watch the full panel discussion in the video above.