Nicole found a major red flag with her super fund. Here's how she started investing ethically (2024)

You might carry a keep cup to reduce waste or install solar panels on your roof to avoid relying on fossil fuels, but what about investing your hard-earned cash for the greater good?

Australians are piling into what's known as ethical or responsible investing — and it's said to be a trillion-dollar industry.

It can also deliver a decent return.

Let's take a look at how it works.

Firstly, what exactly is ethical investing?

"Ethical investing, also known as responsible or sustainable investing, simply means factoring in people, society and the environment into investment decision-making," says Estelle Parker, from the Responsible Investment AssociationAustralasia.

That typically means not putting money into things like fossil fuels, weapons, tobacco, logging and gambling.

Instead, people who ethically invest favour renewables, education, innovation, health care, or maybe recycling.

They also look for companies that have good environment, social and governance (known as ESG) credentials which consider things like a diverse board, and transparency around how much the CEO is paid.

Louise Edkins, a senior financial adviser from Ethical Investment Advisers, says investors are increasingly wanting to protect their own values.

"They're wanting to avoid certain things that they don't believe in. And they also want to be part of the solution," she says.

The 2020 bushfires and growing concerns about climate change started Nicole Haddow on her own ethical investment journey.

"Then a pandemic started and I thought, what kind of world are we living in? And I started to think about what I could do with my money to make a difference," she adds.

So how do you actually do it?

Well, there are three ways most people get started (and you don't need to have a bucket load of cash to do it).

In fact, if you've got a job or a bank account you are already (probably unknowingly) investing in a range of things you're unaware of through your financial institutions and super funds.

Basically, you can call your bank or super fund and if you don't like what they invest in or the projects they loan money to, you can consider switching.

There are some things you'll need to consider before you do though, like whether you have a mortgage that would cost you to switch, or better fees and insurances with your current super fund.

Nicole started by looking into what her super fund invested in. The response she got back was a major red flag.

"I called my existing super fund and I asked them to send me a list of what was in my portfolio.I thought being my retirement fund, it was my right to know. And they said to me that they couldn't tell me, which I just found absolutely staggering," she explains.

You can also research and buy stocks or exchange traded funds (ETFs) that align with your values.

When Nicole started investing she started small.

She used micro-investing apps that allowed her to invest in ethical portfolios of shares (or ETFs) using amounts rounded up from purchases like a cup of coffee.

"If I bought a $4.50 coffee, I could round up that spending to $5. And that 50 cents would go into my fund. So I didn't start with a lot of money. And I slowly enabled myself to grow that over time," she says.

It's also a growing industry. More than$2.8 trillion infunds aremanaged using at least one responsible investment approach (such as ESG integration, or negative or positive screening), according to Responsible Investment Association Australasia.

In 2011, it was only$168 billion.

Beware.Greenwashing is a big thing

Greenwashing is when a company or fund pretends to have environmental or sustainability credentials.

It's more common than you'd think because of a lack of regulation.

"Greenwashing is everywhere," Nicole says.

"It meant really, really digging into a super portfolio or an ethical exchange trade fund and looking at every single holding."

Sounds like a lot of work, right?

Thankfully, there are a couple of online tools that have done the work for you:

• Responsible Returns is a great resource and you can actually search their list of certified products.
• Ethical Advisers' Co-op has also rated super and investment funds based on their environmental and social credentials.

Nicole, who is turning her research on ethical investing into a book,says you also shouldn't get too hung up with being absolutely perfect.

"You'll probably find slowly over time that you can get better at deciphering what a good option is."

What are the returns like?

It turns out ethical investing is not just about feeling good.

Even in 2020, during a tumultuous year which saw markets tumble, Australian responsibly invested share funds matched the ASX 300, according to RIAA’s 2021 Responsible Investment Benchmark Report, with an average return of 1.7 per cent.

Compared to that benchmark they underperformed over the three and five years but were 0.3 of a percentage point higher over a decade.

"The investments were on the companies where there are those investment solutions where there is really strong performance and I think where there is a future," Louise says.

For Nicole, ethical investing is a long-term financial plan that will also hopefully make a difference to the world.

"If large amounts of our population start moving their money over to ethical options, whether that be their banking, or superannuation, those really, really big funds and banks are really going to have to stand up and take notice," Nicole says.

What if I have stocks in a company that doesn't really align with my values?

Estelle says you don't necessarily have to rush out and sell your shares.

"Investors are engaging with those companies. They're using their power, if you like, as investors to consult and engage and make sure that companies are behaving well," Estelle says.

If enough investors get behind an issue and the company does not address it, they can file a resolution and it will be voted on at the annual general meeting where it could become the policy of the business.

What if you care more about social benefits?

If you're more interested in measuring the return on your money by the good it does, you could look at impact investing.

Louise says it's not as easy for everyday investors to get into, but some super funds are doing things like investing in affordable housing projects, or gender equity projects.

"So what impact investing is about having a social benefit as well as a financial return," she says.

One example is social enterprise Streat, which runs cafes in Melbourne that train marginalised and disadvantaged young people in horticulture and hospitality.

While the returns can be lower for impact investing, places like Streat also provide an impact report that measures their social and environmental impact.

"You can come here and you can see the good of your impact happening right around you," says Bec Scott, CEO and co-founder of Streat.

Bec says people who care about the world should make sure they know what their money is being used for.

"Don't let it be invisible, make it visible and go and hunt down kind of how that money's being used. You've got a choice," she adds.

This is general information only. If you need personal advice, please seek out a professional.

Editor's note:This story has been updated to note the underperformance of responsibly invested share funds over the three and five-year timeframes to provide additional context to their outperformance over 10 years.

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