Bitesize: ESG basics – Investing clean & green

Alec: [00:00:07] Welcome to Bite sized on Get Started Investing feed. In this series, we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. 

Bryce: [00:00:21] So Ren, what is ethical investing?

Alec: [00:00:25] It is investing, but screening out all those companies that do unethical things or the definition of what is and isn't ethical we'll get into. But in a sense, it's socially responsible investing. It's only putting your money in companies that you think are so ethical things and do so in a socially responsible manner. And so the big forms of it these days are companies that are sustainable, that are reducing plastic packaging, that are not increasing climate change then. So sustainability is a big one. There's also a big area around sort of ethical supply chains. So obviously there's been a lot of focus on things like sweatshops in Nike's supply chain, which they've done a lot of work on. But there's a bunch of other real problems in the supply chains of major companies these days. Fresh produce supply chains are notoriously difficult to manage. There's a lot of subcontracting and subcontracting to subcontractors. And so there's a whole movement around modern slavery at the moment. So that's probably the second one. The third, another emerging big category is around the technology companies and some of their practices around data sharing, privacy and stuff like that. So you see some companies being considered unethical because of that. And then there's probably a fourth one, which is the vice industries, the gambling, tobacco, firearms, who you're actually saying you want to make an ETF of the unethical ETF? 

Bryce: [00:02:05] Money is money. That is not true. Not sure. 

Alec: [00:02:08] That. Oh, that's a thought to see me that investment. Yeah. So that's a long winded way of saying ethical investing is investing in things that are socially responsible. 

Bryce: [00:02:20] Yeah, nicer. And so you're right. Ethical investing, social responsibility, investing in sustainable investing, the broad sort of strokes that it all falls under. Now, I guess one of the questions is then so these are all sort of screens that fund managers will and individual investors can use to screen out particular companies that they want to invest in. So if I'm an investor and I'm looking to invest in a fund that claims to be ethically investing itself into other organisations, sometimes it's tricky to understand how these companies have screened and also are they truly investing ethically or are they making a few companies in there that really shouldn't be on the list? So I think a consideration that you should take into consideration.

Alec: [00:03:11] You will find. 

Bryce: [00:03:14] Anyway. Look for a fund that's a member of the Responsible Investment Association, Australasia, or otherwise known as the RIAA. This is a peak body that was created and they have a certification program in partnership with the New South Wales Department of Environment and Conservation and the Victorian Government. So that started back in 2005 with a view to make uniform standards across fund managers. So in order to qualify, a fund manager must make a very convincing case to the RIAA that they have a very specific methodology in place to weed out unethical behaviour or unsocial social investing, etc. So the process is then independently verified by an accounting firm and the funds then actually qualify and carry an RIAA certification symbol. So keep an eye out for them. If you are concerned that you may be investing in a fund that claims to be ethically invested. But when you look a bit deeper at the list of companies, you question it. [00:04:22][68.5]

Alec: [00:04:23] So I think before we move on, you touched on screens and the are I I'm not sure where they fall into this, but there's probably two broad forms of screens. There's a negative screen which is more common and then a positive screen. And so negative screen just excludes companies that are bad. So companies that mine fossil fuels and then you exclude any company that mines fossil fuels. So you're looking to exclude companies. The flip side of that is a positive screen. And so you would say the flip, you would say companies are looking to that are making investments in renewable energy or have over 50% of their power procured through renewable sources. And so then rather than looking to exclude companies at the bottom end of the ethical spectrum, you're looking to include companies that are at that top of. 

Bryce: [00:05:21] They're actually making an effort. They're falling in by default just because they're not part of the negative. Yeah. So as an investor, how can I access this growing industry or growing form of investing? So as we've mentioned, ETFs, this is primarily the way to go at the moment from a I guess from a beginner point of view as well, very easily accessible. You've got your, you big hitters Vanguard that have ethical funds. Then also Betashares has one called Fair, F-A-I-R, they're an Australian Sustainability Leaders Fund and then they also have a global sustainability leaders fund called E-T-H-I, so they're both available on the ASX. Go to their website to check out what companies they're investing in. Just to give you a bit of an idea of how their screens work. Now there's another one called the Australian Ethical Managed Funds. They allow you to invest in their funds off market as retail investors, so you need to do it all through their website. But they have a large number of funds available, all ethically themed I guess emerging companies, international, Australian diversified and then they also have a bit of fixed income as well, which should be interesting to have a look at. Now, as I said, they are all offline, so you need to go to their website. But to Ren's point, they are good because they show you the difference between their negative screen and their positive screen. So they go both ways. Another one that we've I've had my own for a while is Morphic Asset Management, and they have Morphic Ethical Equities Fund, which is on the ASX M-E-C, and that's just a list of screened international companies as well. So a couple of options there for you to start having a look. There's many more, but I think that's just a good starting place. If you enjoyed that bite size, you'll find a link to the full episode in the show notes.