What you need to know about ethical investing

There is a growing trend of shrugging off the profit-at-any-cost mindset and investing to support people and planet, while still delivering healthy returns. Yet doing so isn't as straightforward as the sentiment behind it.

When it comes to ethical investing, the devil is very much in the detail.

As with all financial matters, a solid plan and a good understanding of what you're getting into is fundamental. The following tips offer a starting point for making money while making a difference:

1. Determine what 'ethical' means to you

What is deemed as being 'ethical' can mean different things to different people. An increasingly common definition in finance and business is 'ESG investing' - which stands for environmental, social and governance.

This covers environmental impact reduction and sustainability initiatives; fair trade practices over supply chains and programs supporting customers and communities; as well as corporate governance that promotes diversity, equal opportunity and anti-corruption.

To follow ESG investing means ensuring all three criteria are satisfied.

However, you may value one more highly than the others or have additional criteria to satisfy - so consider your own definition of what it means to be ethical and tailor your investment strategy accordingly.

2. Don't fall for the hype

If you believe all the marketing and ads we're exposed to each day, virtually every organisation cares about us and our planet.

If that were true, the world would probably be a much nicer place. Look deeper than slogans to see where your money actually goes.

For instance, degradable plastics sound great at face value - breaking down so they aren't clogging our waterways and suffocating wildlife.

Yet in reality, this generally means the materials break down into microplastics - tiny particles that still pollute our environment and, frighteningly, can end up in our food chain. Perhaps not the most ethical place to invest your money.

3. Follow the money trail

Money talks - so when looking at various investment vehicles, funds or companies, follow the money trail to see where it goes.

Besides your good self (potentially), where do their funds typically come from?

Some people don't like to support the gambling or tobacco industries, for instance, or fossil fuel extractors, even animal racing.

So, it pays to check whether your targeted investment raise funds from sources that don't align with your values Then look to what those funds are used for - and again, whether those uses align with your personal values.

4. Consider the people involved

Globalisation has opened up new growth markets, but also new opportunities for exploitation.

Where investments relate to products or materials (such as fashion, construction and manufacturing) ethical supply chains play a crucial role in supporting global workforces and rooting out corruption, slave labour and exploitation - especially of vulnerable women and children.

Not just in their own business, but their supply partners too.

Underpayment or so-called 'wage theft' is another prominent issue in business, whereby employers - whether deliberately, negligently or perhaps inadvertently - underpay their staff. Over half a billion dollars in unpaid entitlements was recouped by the Fair Work Ombudsman last financial year alone.

And that's just in Australia. So, if it's shares or businesses you're looking to invest in, consider their track record not just in profitability but paying their suppliers and workforces a proper living wage.

5. Location, location, location

Consider where the benefits of a prospective investment are ultimately felt. For example, environmentally conscious investors may seek to look elsewhere. But what are the ethics of bringing about the demise of entire mining towns and the communities they support if they lack a fallback?

In terms of companies, trusts and super funds - what is their track record with taxes and profit sharing? Diverting funds from public resources through tax avoidance or sending profits overseas do little for the country in which they operate.

6. Be logical

Putting your money into ethical ventures is great. But don't forget this is investing - you still need to generate financial returns in order to grow your wealth and support your retirement.

That means ensuring the numbers stack up and there is a solid business case for a particular investment, not just the emotional feel-good factor at supporting a good cause.

Because ethics and investing needn't be mutually exclusive!

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