Ethical investing is continuing to gain traction, especially in an era where individuals are having to seriously question their attitudes towards hot-button issues such as climate change, the treatment of asylum seekers, and many other human rights and environmental concerns.
Many big corporations are also actively positioning themselves in relation to these topics, making public their policies on Environmental, Social and Corporate Governance (ESG) issues, and even using these policies to differentiate themselves from their competitors.
Particularly given the recent devastating bushfires across the country, and the potential link between their severity and the impacts of climate change, now more than ever you might be wondering how you can be more environmentally and socially conscious about where you invest your money.
Here are 3 investment options currently available to you on the ASX.
1. BetaShares Australian Sustainability Leaders ETF (ASX: FAIR)
This ETF invests in a diversified portfolio of local Australian companies that engage in what BetaShares assesses to be ethical and sustainable business practices. BetaShares aims to screen out companies with significant exposures to a raft of ethically controversial business sectors and activities, including fossil fuels, military armaments, animal cruelty and mandatory asylum seeker detention. It even aims to screen out companies that have a lack of gender diversity on their boards.
The ETF goes even further than a simple screening test, preferencing companies which it deems to be "sustainability leaders". These are companies which derive more than 20% of their revenues from ethical sources, such as renewable energy, recycling or health food products.
The fund is weighted towards healthcare, with CSL Limited (ASX: CSL), ResMed Inc (ASX: RMD), Sonic Healthcare Ltd (ASX: SHL) and Cochlear Limited (ASX: COH) all amongst its top 10 holdings. It does have some limited exposure to the mining industry: lithium producers including Pilbara Minerals Ltd (ASX: PLS), Galaxy Resources Limited (ASX: GXY) and Orocobre Ltd (ASX: ORE) all made the list due to the pivotal role lithium plays in the development of environmentally friendly electric vehicles.
The ETF performed well in 2019, with its share price up over 20% for the year.
2. BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
This ETF adopts a similar screening process to the Australian Sustainability Leaders ETF but applies it to international companies, excluding any Australian companies from its portfolio. One of the fund's stated aims is to identify "climate leaders", which it assesses based on their relative carbon efficiency.
The fund is heavily weighted towards American IT and financial companies, with Apple Inc, Mastercard Inc and Visa Inc together making up almost 14% of the total portfolio. Prior to investing you may want to consider how comfortable you are with having large exposures to companies like Apple and another of the fund's major holdings, Nike Inc, which have historically faced accusations of poor working conditions for staff in their Asian factories.
One key benefit of the Global Sustainability ETF is that it provides cheap international exposure for Australian investors. It outperformed the BetaShares Australian Sustainability fund last year, surging 30% higher in 2019.
3. Australian Ethical Investment (ASX: AEF)
A third option is to invest in Australian Ethical, a Sydney-based wealth management company that operates a suite of managed funds as well as a superannuation product. Australian Ethical adopts a similar approach to BetaShares in that it filters out companies from its investment universe that have exposure to ethically contentious industry sectors, and instead weights its investments towards those companies that are actively pursuing socially and environmentally sustainable business practices. An additional benefit of Australian Ethical is that it engages with companies with the goal of influencing their business practices and advocating for change.
According to a list as of 31 March 2019, Australian Ethical invests in a similar range of local and international companies to BetaShares – although Apple and Nike are conspicuously absent. As with BetaShares, a significant number of Australian Ethicals investments are in the IT, energy, healthcare and biotechnology sectors. It also invests in Pilbara Minerals and Orocobre (though the cynic in me can't help but note the strategy behind categorising these investments as "Other" rather than "Mining" or "Industrials").
Australian Ethical enjoyed a strong 2019, surging more than 130% higher. Given the growing interest in ethical investing, it could continue to deliver equally strong returns over 2020 and beyond.
Foolish takeaway
Investing ethically isn't always easy. The options identified in this article all provide cheap access to a diversified portfolio of apparently ethical companies, but they still may not completely align with your personal values. The broad-spectrum screening rules adopted by these investment vehicles may mean that you still wind up investing in certain companies whose business practices you may not agree with. So, before you invest, always research the fund and its stated aims and policies, and consider to what degree you are comfortable supporting the companies it invests in.
