Investing ethically: It’s up to youInvesting ethically: It’s up to you

A few years ago, the Herald broke a story that got everyone talking: lots of major KiwiSaver providers were investing members’ money in companies like tobacco companies and arms dealers. Predictably, not everyone was happy about this, and most of the KiwiSaver providers have now made changes around what they invest in, and what they avoid. 

With that in mind, we thought we’d get into some of the details of how you can invest ethically, and what to look for when you’re investing ethically. 

Your values

Ethics are very personal. There’s no absolute right or wrong answer as to which investments are ethically acceptable, and which investments are not. Different people value different things. 

But if you want ethics to be part of how you make investment decisions, you should think about which issues matter the most to you. Are you concerned about climate change? Do you think CEOs get paid too much? What about workplace health and safety, or workers’ rights in general?

It might be useful to get a bit of paper and write these down. Organise them like a traffic light—the “red” issues are the issues you don’t want to invest towards at all, while the green issues are things you actively want to invest towards. Everything in the middle is an orange issue, which you can decide on a case-by-case basis. 

Making ethical investment decisions

Now you can start mapping these issues to different investments. For example, if climate change was one of your red issues, then you may not want to invest in an oil company. If gambling was one of your red issues, then a casino may not be the investment for you. 

But this is easier for some issues than it is for others. For example, if you’re really concerned with human rights and workers’ rights, how do you figure out which organisations are treating their employees well, and which ones aren’t? What’s more, how do you define something like that in the first place?

ESG investing

One way to do this is to invest in funds that follow an ESG strategy. ESG stands for environmental, social, and governance. Funds that follow a strategy like this will make investment decisions based on how well companies perform on these criteria—do they treat the environment well? Do they treat their people well? Do they have good processes and fair pay?

The benefit of investing in funds that use ESG is that the fund is making the decisions for you. But there are a couple of tradeoffs as well. First of all, your values probably won’t 100% map to the way the fund applies ESG principles. They might be close, but they won’t be 100%, because values are unique to you. 

Second of all, there’s no standard set of rules for what makes a company “good” or “bad” in terms of ESG. So it’s worth researching the fund, to see if they’ve published an ESG strategy. Do they seek out “good” investments, or do they just avoid “bad” ones? How do they define ESG criteria? The closer these definitions are to your own set of values, the better. 

The important thing to remember here is that there’s a broad spectrum of ESG approaches—so if this is important to you, make sure you have a good handle on how the funds you’re investing in apply ESG. 

Invest in companies

If you want 100% control over where your money goes, creating a portfolio out of companies may be the best way to make this happen. To do this, just go through the red, orange and green light exercise you did earlier, and figure out which companies apply to which colours. Then, you can use that information to drive your investment decisions. 

You can Google a potential investment with some key words related to issues you care about. Are news stories coming up that you don’t like the look of? Conversely, are there news stories coming up that you really like the look of? Remember, ethical investing isn’t just about avoiding investments that are getting things wrong, it’s also about supporting investments that are getting things right. 

You can also go deeper if you want. Some companies release specific reports into sustainability and other ethical issues. You can read these if they’re available, and use the information in them to make a decision. Otherwise, you can just look through annual reports, as these give a pretty good idea of what companies care about, and what they invest their money in. 

Of course, the tradeoff here is that it takes more time to research each company, and you also need to make sure you’re diversified. As with everything in ethical investing (see the theme?), it’s up to you and how you want to express your particular values. 

A mixed approach

Finally, you can have a mixed approach. Investing ethically doesn’t have to be an all or nothing proposition. You can divide your portfolio across all sorts of dimensions, and ethical investing is no exception to this rule. 

You could invest some money in ESG funds, plus some money in companies that you think are doing a particularly good job at creating a world that is in line with your values. If you wanted, you could even invest some money in a fund that doesn’t think about ethics at all. 

This approach gives you the best of both worlds. You get a diversified portfolio, which helps reduce the impact of risk. But you also get to send a message about what kinds of companies you support more than others, and how important ethics are to you when it comes to choosing an investment. 

Wrapping up

Twenty years ago, most investors just sought out investments that paid them the return they wanted. Now, investors are looking for more than just a return. They’re also looking for investments that reflect their values. 

This is really exciting because it gives you the opportunity to make a difference with your investing. The amount of difference you make, and kind of difference you make, is up to you!