Andrew Zbik
Ethical investment has been discussed in news articles, financial advice industry publications and, in my personal experience, discussions with clients about how to manage their wealth.
The Responsible Investment Association of Australia (RIAA) reported that in 2020 ninety per cent (90%) of investors believe that impact investing will become a more significant part of the investment landscape. In my role as a Financial Adviser, I am having this conversation more often with clients.
How do you access ethical investments? Firstly, most people think about trying to specifically choose individual companies to invest in. However, statistically trying to pick individual stock winners often leads to portfolio underperformance.
The below table is from Standard & Poors who have been measuring how ‘active’ fund managers (i.e. the professional managers trying to pick individual winners) perform compared to the ‘market’ (i.e. all the companies listed on a stock market).
The results are alarming. In 2019 almost two-thirds of fund managers underperformed compared to the market. This means statistically you would have achieved a better return in your portfolio from buying an index fund that mimics a market opposed to trying to pick individual stock winners.
Back to that question – How do you access ethical investments?
Below are two exchange traded funds that I have recommended to some of my clients. The benefit of these exchange traded funds is that they use primarily an index approach and then apply a positive filter to remove companies that may not meet a certain ‘ethical’ criterion.
Alternatives for Australian shares
State Street’s SPDR® S&P®/ASX 200 ESG Fund (Ticker Code: E200)
Ignore all the TLAs (three letter acronyms). This exchange traded fund focuses on investing in ‘sustainable’ companies within the top 200 companies on the Australian Securities Exchange.
Key features:
- Responsible Investing – a sustainable alternative to Australia’s flagship benchmark, the S&P/ASX 200 Index.
- Best-in-Class Environmental Social Governance (ESG) Investment Approach – focused on Australian companies with strong ESG characteristics, while also removing companies interacting with tobacco and controversial weapons.
Betashares Global Sustainability Leaders ETF (Ticker Code: ETHI)
Fund objective
ETHI aims to track the performance of an index (before fees and expenses) that includes a portfolio of large global stocks identified as “Climate Leaders” which have also passed screens to exclude companies with direct or significant exposure to fossil fuels or engaged in activities deemed inconsistent with responsible investment considerations.
Benefits of ETHI
- Align your investments with your values – invest in a way that is consistent with your ethical standards.
- True-to-label – combines positive climate leadership screens with a broad set of ESG criteria, offering investors a true-to-label ethical investment solution.
- Diversified global exposure – holds a diversified portfolio of large, sustainable, ethical companies from a range of global locations.
By Andrew Zbik, Senior Financial Planner