How to know if your fund is really an ethical investment


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There was a time when people thought that investing responsibly meant compromising on returns.

Research has shown that this is not necessarily the case and now with more responsible investment options available than ever, it's easy to invest in the good things you care about.

Here are our top five tips to get started.

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1. It's all about you

Finding responsible investments that are aligned with your ethical view of the world means first identifying what matters to you.

Whether it be investing in female-friendly companies, divesting from fossil fuels, or supporting LGBT rights, there are investment options available to suit a wide variety of ethical goals.

If you don't have a particular goal in mind, you might be interested in a fund that invest in mainstream investments and donates its management fees to charitable causes, such as Future Generation.

2. Find a fund

Now that you've identified what you want to invest it, it's time to find a fund that meets your goals. Here are some tools to help:

- The Responsible Investment Association of Australasia has an investment finding tool that allows you to search for funds that match your ethical goals.

- The Impact Investing Hub contains a list of current impact investing funds and direct investments available in Australia.

- If you're interested in investing via Exchange-Traded Funds (ETFs), Balance Impact provides a guide to global ethical ETFs, updated annually.

3. Read the fine print

Let's say that you've decided to divest from fossil fuels, and you've found a fund that is fossil fuel free. Unfortunately fossil fuel free is not a defined term. It's worth reading the small print to determine:

- How the fund defines a fossil fuel company - is it a company that owns reserves, or a company that generates revenue from fossil fuels?

- Does it exclude all fossil fuels, or just thermal coal?

- Does the screen cover direct fossil fuel companies only, or does it include indirect, such as banks that lend to fossil fuel companies?

If reading the small print is not your thing, the quickest way to check if a fund is true-to-label is to download a list of current holdings.

If you're trying to exclude fossil fuels, but the fund contains Woodside, Caltex and Santos then there's no need to read the small print, you can move on to the next fund.

4. Consider fees

Fees for responsible investment funds may be higher than mainstream funds.

The argument goes that responsible investment managers have to consider all the usual investment criteria, plus the additional overlay of its responsible investment criteria, which takes more time and therefore costs more.

Thankfully this is now changing and there are some well-priced responsible investment funds on offer. These include responsible ETFs and Listed Investment Companies.

5. Review the financial and social performance

Whether you have decided to invest in a low-cost passive fund, or a higher cost actively managed fund, make sure that any higher fees are justified by higher performance.

When considering performance, it is better to focus on longer-term performance (five or more years) than short-term performance, as it is more likely to show a trend rather than a one-off.

In addition to the financial performance reporting, look into the social impact reporting that the fund provides. If a fund aims to achieve particular responsible investment goals, it should be reporting on them.

Social impact reporting metrics are now widely available, for example Yahoo Finance provide sustainability ratings for many Australian companies, meaning there is no excuse for responsible investment funds not to report on their social performance.

According to the Responsible Investment Benchmark Report 2018, over the past three, five and 10 year periods Australian responsible investment funds have outperformed mainstream investment funds.

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Emily Martin CFA is chief investment officer of Balance Impact, Australia's first online ethical investing platform.