Ethical investing is the practice of putting your money where your values are.

It’s also sometimes referred to as ‘socially conscious’ or ‘socially responsible’ investing.

Historically, ethical investing was often based upon religious beliefs.

In recent times, it has tended to be based more upon peoples’ social and environmental views.

Over the past 20 years, ethical investing has focused heavily on environmental issues, with investment moving away from coal and fossil fuels and more towards cleaner and renewable energy sources.

On the social side, work practices and slave labour are among issues of major concern for many investors.

Socially responsible investing may rely on a set of pre-existing guidelines or principles to aid the selection of a portfolio. This is particularly so with managed funds.

In other cases, it depends on an investor’s own ethical principles and interests.

One investor might avoid companies involved in gambling, alcohol and weapons, for example. Another may shun oil and gas shares, preferring to seek out renewable energy and recycling companies.

What one investor considers to be ethical may be viewed as unethical by another investor.

Negative and positive screens

Historically, most ethical funds have used a ‘negative screen’ to filter their investment choices.

This means excluding investment in industries that have a negative impact on society and the environment.

Other managers operate ‘positive screens’, whereby they proactively search for investments that contribute positively to society.

Individual investors can, of course, adopt either of these approaches when selecting investments.

These screens naturally give rise to a portfolio that differs in its industry composition from the market as a whole, and from mainstream investment funds.

As a result, returns from ethical investment funds don’t always match the overall market for every time frame.

However, the more established funds are now starting to keep pace with broader market returns.

Rising popularity of ethical investing

Funds promoted as ethical or responsible investment in Australia have quadrupled in size over the past three years and now comprise approximately $622 billion under management.

In part, this is due to the increasing awareness of social and ethical issues aided by the spread of information via the Internet and social media.

It also reflects changing attitudes amongst younger investors.

More accessible information also means that traditional investors are gaining an awareness of the behaviour of the companies that they are supporting, either directly or indirectly, with their capital.

Despite this considerable growth, ethical investment it is still classified as niche investment.

However, as more people seek out ethical investment opportunities, and more companies step forward to tackle both environmental and social challenges, the ethical investment sector is on its way to becoming an asset sub-class of its own and taking its place in mainstream investment portfolios.

Interested to know more?

Understanding our clients’ ethical values and designing investment portfolios that reflect those values is a natural part of LDB’s service.

To find out how you can bring your investments in line with your values, call us on (03) 9875 2900 and talk to one of our experienced financial advisers.