This article breaks down the marketing tricks behind some financial products with the ethical label and the difference between sustainable and ethical investing in Australia.
Ask around and chances are most people will tell you that investing ethically is important to them. Why? It’s based on their values.
However, the reality is that if you are NOT investing in individual stocks (e.g. you invest via ETFs, managed funds or Super) chances are you are investing in a sustainable way — not “ethically”.
Responsible or ethical: is it just marketing?
There are two reasons I want to draw your attention to this important distinction:
- Ethics are your own. While pre-built strategies, screening techniques, and processes can come close to resembling your ethics, you might need to compromise a little bit. For example, you might be completely against alcohol companies (your ethical principle), but when it comes to society’s values, the ETF or Super fund you’re investing with might have a beer company in the portfolio (since it aligns with the fund’s ESG framework or investing policy). In our survey, 64% of investors said that even if you can’t invest all of your portfolio ‘ethically’, it’s still worth trying to invest some of it in a way that matches your principles.
- Many ETF providers, Super funds or fund managers like to slap an “ethical” badge on their strategy to jack up the fees and charge you more. Every professional deserves to earn a fee for their services. Even financial firms. However, I want you to be careful and remember that unless their principles align perfectly with yours, it’s probably fair to call it a sustainable or “responsible” investment, rather than an “ethical” investment. In our survey of investors, 7 of 10 people said that “human input” is required to make an investment decision “ethical”. Meaning, it can’t simply be based on predefined rules or a black and white formula.
Basically, what’s important to remember is that you should check to make sure the thing you’re investing in is actually ethical or sustainable so that it meets either your expectations for ‘ethical’ or, at the very least, what you consider to be ‘sustainable’.
The difference between sustainable and ethical investing
When our Rask team did a questionnaire of Australian investors we found that 72% of investors believe sustainable investing is about investing in companies that “operate with consideration for environmental, social and governance (ESG) factors and conform to societal values”.
In the same survey, 65% of investors said ethical investing is about investing in shares or ETFs according to your personal values.
In the following Australian Investors Podcast episode, I talk with former Rask Analyst Max Wagner about our sustainable investing survey results. We talk about what is and isn’t an ethical investment, ETFs, shares, and more.
While this is our intermediate podcast, you should consider subscribing to our series on iTunes, Spotify, Castbox or YouTube to keep learning.
Do you notice the difference?
Sustainable investing is about investing in shares of companies or in assets that avoid doing bad according to society’s values.
Ethical investing is about investing in companies that align with your values.
