“The secret to a fulfilled life is not only to do well, but to do good.” That’s ethical investing 101.
Whatever your personal, political or social view of the world, there’s one thing we can all agree on: it’s never been as batshit crazy as right now.
Reeling off the back of (and sometimes dipping back into) a global pandemic, sandwiched somewhere between ravaging bushfires, devastating floods and arid drought – ethical investing is on the mind of many of us looking to be cleaner with our investments.
How can we still amass wealth without ruining the planet in our efforts?
What’s the point of retiring into a world that’s unravelling at the seams anyway?
Is it possible to make ethical and sustainable choices with our money – and if so, how?
More importantly, how do we know what’s really green – and not just greenwashed?
Today we’ll cover ethical investing for beginners. Buckle up, FIREpioneers, we got some serious whips to crack.
Where do I start with ethical investing?
There’s a deep-rooted conundrum at the heart of ethical investing; a simple effort-to-return equation that has most people putting it on the ‘later’ list. Cost-effectiveness.
Is it cost-effective, and profitable, to invest ethically?
In my opinion, yes. In fact, our ethical index fund stock has performed significantly better than their dirtier, more rascally counterparts – with FAIR and VESG in particular smashing excellent annual and five-year returns.
Analysts at The Guardian agree, too, a year ago publishing promising Morningstar research that showed how well ethical funds did leading up to, and even despite COVID’s economical fallout.
Better, in fact, than industry-leading traditional funds.
So, yeah, ethical investing makes total sense – so long as you can actually get a return that matches, or exceeds, non-ethical funds of a comparable structure. Luckily, the odds of that aren’t so odd in 2021, meaning you shouldn’t be penalised for trying to do the right thing by mother E.
Paying a premium that only morally outweighs the alternative, only to wear the virtue signal as a badge of sacrifice is just silly. We’re lucky we’re living in a time where we don’t have to choose between fiscally sound investments, and ones that make us feel less disgusting.
So, with that said, what’s the easiest way to figure out if an index fund is truly ethical?
Funds that meet the stringent criteria for environmental, social and governance standards can be safely invested in with the knowledge that rootin’ tootin’ pollutin’ industries aren’t benefitting from your dollars.
Think fossil fuels, but also the tobacco, alcohol and porn industries, companies that test on animals, export live animals or are known to support offshore sweatshops, and companies that support gambling and violence. These are usually referred to as “sin stocks”, meaning defensive assets that perform well even during economic dips (because, well… humans).
The Morningstar Sustainability Rating offers a good overview on ESG criteria here if you’re skeptical, but the accreditation does stack up well by all accounts.
Ways to ethically invest.
In ethical indexes and ethical funds, fund managers are tasked with investing in companies and industries that have a meaningful level of oversight into not just the impact of the industry, but all people involved in the supply chain and all materials and resources used – including where they end up.
Given that share investing is such an integral part of many people’s path to financial independence (you can even ‘paper trade’ for practice!), investing in ESG funds is a good place to start on your ethical investing journey – but it’s not the only way. Let’s take a look at some others.
Consider how to gear property investments more effectively.
I don’t mean that kind of gearing.
Owning and tenanting investment real estate is often the subject of many ethical criticisms, but I think that in a market where we have gross undersupply of good homes to the amount of people needing to live in them, tenanting an investment property out responsibly is crucial to ensure well-managed, tenant-focused housing.
Case in point: we put our Sydney property on the rental market during the first serious Australian COVID lockdown of 2020.
At one point, we had two very different tenancy applications presented to us. One was of a double-income couple (one in a full-time paramedic role, a position that would be considered largely safe in the context of a global health crisis), and the other from a jobless and divorced single mum of two.
We were also doing this at a time where a national moratorium on rent payments had been announced. If our tenant couldn’t pay their rent, given the circumstances of the pandemic we would have no right to evict them. The shortfall would be on us.
The single mum had written us a beautiful application that stated her case clearly. She told us that she had been looking for a while (been rejected from many), had fallen in love with our place and was excited to gain back some normalcy there with her daughters. She told us that her ex-husband had agreed to cover her rent payments, given she had no permanent income.
It was risky, but when my husband and I discussed our responsibility to conduct ourselves in our investment position for the good of all, the decision was clear.
We accepted her application, against our agent’s advice. We figured that in a renter’s market, which it was at the time, the dual income couple would have no issue finding a place. They didn’t – they were accepted on another they had applied for by the next day – and we welcomed her into our home. She’s just renewed another year and has been a fabulous tenant to date. We have reciprocated by making sure that we are open to fair and reasonable negotiations in regards to rent price, repairs are made swiftly and without fuss and that the agent’s we have chosen always behave in good faith to her.
Now, I’m not saying that you should run around as a bleeding heart.
We asked our tenant if she could mitigate the risk by paying for three months upfront. Similarly, there will be contingencies you can put in place around your property and you’ll know when a tenancy application just doesn’t feel right. At the crux of it, though, I believe that properties owned by everyday Australians, rather than by developers or corporate entities, are always better for the community in the long-run.
Look at your ethical investing potential as a whole.
Superannuation is a great and tax-effective way to achieve financial independence.
Given that for many people their employers have to pay into it mandatorily, and they can’t access it until they reach “preservation age” (can we just take a minute to let that horrible term sink in?!), it’s got all of the factors a good FIRE investment-eth make.
Early start. Regular contributions. Compounds long-term. Lovely jubbly.
…But there are ways to do it ethically.
Super is essentially share investing, just within a specific company structure, and you don’t do the investing because the fund management team does – less their transaction fees which are built into the model.
Superannuation funds like Verve Super and Future Super come to mind straightaway, but you can find a few out there. Investment returns data for these funds is really promising, too – I encourage you to go and have a look.
Another option is to move into a self-managed super fund, where you choose and manage your own investments and insurances. I know that for me, though, with my age and the fact that I’m proactive in the share market already, an industry fund is the one that gives me that same exposure but with one less asset to actively think about.
If you have any cash held in a savings bank account, you might be pleased to know that you can move to banks who prioritise ethical practices now, too.
Personally, I think it’ll be hard to find a bank completely green but there are certainly options whose lending clientele don’t extend to the likes of fossil fuel conglomerates at the very least.
Bendigo, Suncorp, Heritage and ME are included in this list, with Bank Australia up there as the most generally clean bank. Financial products within certain non-ethical banks might also have an ethical component, but to me that’s akin to invading a country by force and then setting up a sweet little hospital to deal with the casualties. Cynical but true.
Ultimately, you’re probably not going to see a huge return on bank savings compared to having it invested elsewhere, but it’s worth looking at your money holistically. Many day-to-day transactions happen through a bank account, so why shouldn’t it be scrutinised to the same degree?
Other ways to pursue ethical investments.
- Use everyday spending cash flow for good. Invest in solar panels for your house, or opt for the green power energy plan from your energy provider (many have one). Adopt minimalism into your life more broadly.
- Use your money to make tax-deductible donations to registered charities, and use that to offset your income tax. If it’s going somewhere, better to be in the pockets of a registered charity than the tax office.
- Can’t afford to free up extra cash from your income to donate for causes you care about? Use dividend income instead. Dividends, when donated to registered charities, can be tax-deductible too, avoiding the CGT component.
- Invest your time. Head to the local pound or homeless shelter – or any organisation in an area you’re passionate about – and invest some elbow grease and hours. Even contributing to a community garden or beach cleanup is a better use of time when the alternative is sitting in an office chair, wiling away.
Good luck! As you move through the stages of financial independence, it’s very commendable to think about ethical investing on the way. Luckily these days, making sure your FIRE aspirations don’t start the next bushfire is not only morally right – but fiscally sound.