What you need to know about sustainable investing

As daily conversation in Australia is increasingly dominated by concerns about the environment and global warming, more and more investors are looking at how they can make a difference and choose sustainable or ethical investments as part of their portfolio mix.

So what exactly is an ethical investment?

The answer can vary depending on your own personal values and attitudes, covering a range of issues usually referred to as ESG standards or Environment, Social and Governance criteria.

Most people would readily agree that cigarette makers or arms manufacturers are not ethical investments, given the devastating consequences both products can have. However, it is not so easy to decide whether Fortesque Metal, for example, is an ethical investment.

On the face of it, as one of Australia’s largest iron ore producers, it would appear to fail the test for most investors. But, given the company is committed to using hydrogen to power all its ships, trucks and trains and achieving zero greenhouse emissions by 2040, perhaps it actually passes?

In fact, most companies listed on the Australian Stock Exchange (ASX) are attempting to embrace ESG standards to some degree, either by recycling more, reducing their emissions, or in the case of Australia’s big banks, considering environmental issues when evaluating new projects.

Sustainable investing is gathering pace with few companies wanting to be seen as being anchored to out-dated equipment or technologies, or ignorant of their responsibilities to adopt better, more sustainable forms of operations.

While all investment decisions require some degree of homework to ensure they are the right choices for your particular circumstances, you need to do even more if you are committed to increasing your exposure to this fast-growing part of the market.

Start by deciding what you see as the most important ethical issues and which you are less concerned about. Then think about how much of your portfolio you will commit to sustainable investments, given that any sustainable investment is likely to produce either lower returns and/or greater risks.

Also be aware that some companies may engage in ‘greenwashing’, where they make their operations appear much greener or sustainable than they really are. Look for real achievements in areas that match what you see as important sustainable issues.

Then decide what type of investments are best suited to your investment style. There are many individual companies listed on the ASX that may fit your criteria, and an increasing number of managed funds also focused on this area.

Again, be sure you do your homework and take your time finding companies or fund managers that clearly outline their ethical credentials, so you can ensure they are in line with your own. If you have any doubts, seek professional advice from a qualified financial planner.

There can be enormous personal satisfaction in knowing that your investment decisions, no matter how small in the scheme of things, are contributing to encouraging all businesses to embrace more sustainable initiatives.

And as technologies improve and progress is made in this area, investment returns are being pushed higher, while risks are diminishing, giving you the best of all worlds as an investor.