Investing ethically with an ESG framework

5 minute read

You can do good by doing well, and vice versa.

As a financial adviser who works closely with clients in the medical industry, I am increasingly asked, “How I can apply the values and ethics that I foster in my profession to my investing?”

Firstly, what does ethical investing mean? 

Ethical investing means investing in alignment with your personal beliefs and values. You can use an Environmental, Social and Governance (ESG) framework to guide these investments.

ESG investing has garnered a lot of attention in recent years and is used to screen investments based on corporate policies and to encourage companies to act responsibly.

Environmental, Social, Governance framework

Examples of ESG criteria might include: 

Environmental – How an organisationmanages carbon and climate change vulnerabilities, water and waste pollution management, and uses renewable energy and clean technologies.

Social – The level of diversity within an organisation; its commitment to equitable labour or dedication to social justice; the ethics of its supply chain and sourcing; and its community engagement, which could include its focus on First Nations peoples.  

Governance – Which, if any, political parties the company is associated with; its business ethics, executive remuneration and the role of its board in overseeing the conduct of executives.

In most cases, medical professionals also like to apply some personal preference or principles when screening investments. For example, you might refuse to buy into problematic industries like tobacco, gambling, weapons or alcohol. I have also had clients approach me about choosing investments that meet spiritual and religious beliefs.  

How do ESG investments perform? 

The short answer is that these investments have recently performed well compared to non-ESG investments.

In fact, in Australia, ESG investments have generally performed as well as and better than multi-sector funds over the short and mid-term. In some cases, they have significantly outperformed mainstream Australian share fund benchmarks over a 10-year period.

Of course, there are always exceptions and comparatively bad years; however, research has shown the average responsible investment fund in Australia will outperform the ASX total return or index over a five- or 10-year period. 

As a medical professional and ethically minded investor, what should I consider?

Firstly, the fees to invest within ESG investment options are typically higher than in regularly managed investments. The reason for this is the added research required to screen the investments and companies held by the fund to ensure they meet both appropriate ESG standards as well as usual investment quality.

Depending on your personal ethics and the areas you wish to champion, it can be difficult at times to perfectly screen what you are after. A fund may say “ESG” or “ethically invested”, but this does not necessarily mean it will fit with your values. I’ve had clients, for example, that have not wanted to associate with some banks and insurance companies due to the exposures they may have to climate change.

As obvious as it may sound, investing in ESG funds comes with many of the same risks that come with being actively invested in the market. You’ll find you’re still exposed to economic and legislative impacts just as you would be with other investments.

If the fund managers get it right, you can do quite well. However, there is always the risk of underperformance within the market and to more broadly invested, non-ESG investments comparatively. Although the relative performance of these investments is not what I usually find drives interest for clients, it is still nice to do well.

How can I invest through an ethical framework?

As a starting point, most super funds offer at least one ESG investment option that may be worth considering before looking into a new product. There are also a few superannuation providers that only offer ethically aligned investments. Below are my general suggestions when deciding whether one of these funds is right for you.

  1. You want to ensure that the investment option chosen is invested with an appropriate ratio of growth to conservative assets to meet your needs. You may find that with only the one ESG option available with some funds, it will be invested more aggressively or more conservatively than you feel comfortable with or need.
  2. Consider engaging a financial adviser who can work with you to create a strategy that invests either wholly or partly in ESGs. Generally, people with a responsible investment strategy opt in for a strategy that integrates ESG assets into their portfolio.  
  3. Determine your ESG principles and non-negotiables. For example, do you want to champion the environment, increase diversity or promote growth in developing sectors? Is it the active exposure to non-ESG areas you want to avoid with standard investment funds, or would you be happy with an indirect index focus?

Knowing your principles, the guidance of an expert will help you to narrow down choices and compile a portfolio that aligns with your beliefs.

Arash Zamansani is a senior financial adviser at William Buck Advice.

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