Ethical Investing: What It Is and Why It’s Becoming So Popular
In recent years, the term ethical investing has moved from niche financial circles into everyday conversations. More investors are asking not only “What will my investments earn?” but also “What will my investments do?”
This approach to investing considers not just the potential for financial returns but also the broader impact on society and the environment. Ethical investing is about aligning your money with your values and it’s a growing trend that’s reshaping the investment landscape.
What Is Ethical Investing?
Ethical investing, sometimes called responsible investing or sustainable investing, is the practice of choosing investments based on both financial considerations and ethical or moral values.
This could mean avoiding companies involved in activities you disagree with (like tobacco or gambling), or actively supporting businesses making a positive difference (such as renewable energy).
While the definition of ethical can differ from person to person, the underlying principle is the same, ensuring your money works in ways that reflect your personal values.
The Growing Popularity of Ethical Investing
Ethical investing is no longer a fringe concept. In Australia, the Responsible Investment Association Australasia (RIAA) reports that the majority of professionally managed funds now incorporate some form of responsible investing strategy. Globally, trillions of dollars are managed using ethical or sustainable approaches.
Younger investors, in particular, are leading these changes, with many prioritising environmental and social considerations alongside financial performance. However, it’s not just younger generations we are noticing shifts in retirees, parents, and business owners also looking to make their portfolios more aligned with their beliefs.
Climate change awareness, and high-profile corporate scandals may have accelerated this shift, making investors more conscious of where their money goes.
Methods of Ethical Investing
There are several approaches to building an ethical investment portfolio, each with its own focus. Here are the main methods:
1. Negative Screening
This involves excluding certain industries or companies that don’t meet your ethical criteria. For example:
Tobacco
Fossil fuels
Weapons manufacturing
Gambling
Alcohol
Companies with poor human rights records
Negative screening is often the first step for investors wanting to avoid causing harm and excluding companies that don’t match your values.
2. Positive Screening
Positive screening focuses on including companies or sectors actively making a positive difference. Examples include:
Renewable energy producers
Businesses with strong diversity and inclusion policies
Companies committed to sustainable supply chains
Companies giving back to their communities
This approach seeks to reward and support good corporate behaviour.
3. Impact Investing
Impact investing goes one step further, the investment’s primary goal is to achieve a measurable positive impact while still generating a financial return.
For example:
Financing affordable housing projects
Funding clean water initiatives
Supporting health programs in disadvantaged communities
Impact investing is often targeted, measurable, and transparent.
Pros of Ethical Investing
Ethical investing offers a range of benefits that go beyond just feeling good about where your money is:
Alignment with personal values – You can invest in a way that reflects what matters most to you
Encouraging corporate responsibility – By directing money toward ethical companies, we can collectively influence corporate behaviour and priorities
Long-term sustainability – Businesses focused on environmental and social sustainability may be better positioned to adapt to future challenges
Personal satisfaction – Many investors feel more engaged and connected to their portfolios when they know the positive impact they are making
Cons of Ethical Investing
Like any investment approach, ethical investing also comes with challenges to consider:
Performance variation – Avoiding certain sectors might limit diversification and affect performance
Differing definitions – What is ethical to one investor may not be ethical to another, making it important to choose funds that align with your values
Possible higher fees – Some ethical funds may have higher management costs due to additional research and screening required
Greenwashing risk – Some companies or funds may try to appear more ethical than they truly are
Real-World Impact of Ethical Investing
The impact of ethical investing can be tangible. Choosing to invest in renewable energy projects, for instance, can directly contribute to reducing carbon emissions. Supporting companies that treat employees fairly and promote diversity can influence broader workplace standards.
While an individual investment might feel small, collectively, investor choices can drive significant change. When enough people demand ethical practices, companies notice and often adapt.
The Risk of Greenwashing
Greenwashing occurs when a company or fund claims to be environmentally or socially responsible but, in reality, does not meet those claims. This can be misleading for investors trying to make genuinely ethical choices.
Greenwashing might include:
Overstating environmental benefits
Using vague or unverified claims like eco-friendly without proof
Highlighting minor ethical actions while ignoring larger harmful practices
To avoid greenwashing, it’s important to look for transparency, third-party verification, and clear reporting from the companies or funds you’re considering.
Is Ethical Investing Worth Doing?
Whether ethical investing is worth it depends on your personal values, financial goals, and priorities. Many investors find it rewarding to know their money is helping to shape a better future, while others prioritise performance or other considerations.
The good news is, with the growth of this space, there are now more options to find investments that offer both ethical alignment and competitive returns.
Seeking Advice and How a Financial Advisor Can Help
Choosing the right ethical investments can be challenging. There are countless funds and products on the market, each with their own definitions, screening methods, and performance records and fees.
A financial advisor can help by:
Clarifying your values – Understanding what matters most to you
Explaining different ethical strategies – From negative screening to impact investing
Researching and comparing options – Finding investments or super funds that align with your criteria
Ensuring portfolio balance – Making sure your ethical choices fit within a well-diversified plan
Working with an advisor can make the process smoother and help you invest confidently without losing sight of your broader financial objectives.
Ethical investing is no longer a niche concept, it’s a mainstream approach reshaping how Australians think about their investments. By aligning your investments with your values, you can potentially contribute to positive change while still working toward your financial goals.
As the sector grows, so too do the opportunities and the complexities. Taking the time to understand your options, be aware of greenwashing, and seek professional guidance can help ensure your ethical investment journey is both meaningful and effective.
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After working as an advisor for a decade, Joel founded Unified Wealth.
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