Did you know that huge chunks of our superannuation - which is now worth more than a trillion dollars - are invested in companies involved in industries such as old-growth forestry logging and uranium mining, as well as products that cause greenhouse gas pollution? Or that State Government superannuation funds are investing hundreds of millions of dollars of their employees' super in gambling, cigarette and oil companies?
When making investments, super funds and fund managers aren't required to take into account labour standards and social, ethical or environmental considerations, unless they specifically say they do.
That's where 'ethical' and 'sustainable' investing should come in. But does it? Even if you opt for what you think is the 'green' option on your super fund's investment menu, you might still be directing money into some of those less-than-green industries, so it's important to do your research and find out exactly where your money will go.
Types of ethical investment
Ethical investing: Companies and sectors are negatively screened and not included in portfolios if they make or sell certain products. Positive screening can also be part of the process. See our Jargon buster (below) for more about positive and negative screening.
Socially responsible investing: Companies are generally screened out if they take part in excluded activities, but may be included if their commitment to social responsibility outweighs the negative aspects.
Sustainable investing: Investments are chosen on the basis of how well a company manages environmental, social and corporate governance factors, not on what the company makes or sells.
Who decides what's ethical?
If you're considering ethical investment, look for a fund that's a member of the Responsible Investment Association Australasia (RIAA). The peak body created a certification program in partnership with the NSW Department of Environment and Conservation and the Victorian Government in 2005, with a view to making uniform standards of disclosure for funds.
In order to qualify, fund managers must make a convincing case to the RIAA that they have a specific methodology in place to weed out unethical behaviour. The process is then independently verified by an accounting firm. Funds that qualify carry an RIAA certification symbol.
ESG – Environmental, social and governance
The biggest ethical shift in recent years has been the increasing dominance of the sustainable approach, or environmental, social and governance risk management (ESG).
In essence, this means fund managers who are considering investing in a company look at how it's run and how it manages the environmental and social impacts of activities, rather than just looking at ethical factors.
The theory is that companies that do less harm, look after their staff and are well managed, will provide better returns.
For the RIAA, the rapid expansion of the ESG approach is an opportunity to bring all investments under an ethical umbrella, bound together by the universal goal of seeking higher returns. Applying a universal approach that's driven by returns to investors as well as ethical concerns is particularly critical, RIAA says, since ethical funds that rely only on screening make up a small part of the consumer market.
Where can I invest ethically?
Your super fund
Most large super funds offer a sustainable option, often outsourcing the investment function to a large fund manager. And you don't have to put all your eggs in one basket – super funds often let you divide your investments among several options (for example, their 'responsible' and ordinary share funds).
The RIAA has more info on these funds.
Most of the same investment funds and managers are accessible outside of super too. A number of specialist funds invest in areas that are considered responsible and sustainable, such as renewable energy.
You could always invest in particular shares, and in companies you believe are acting responsibly and ethically, without going through a managed fund. And some super funds allow individual share selections from ASX 200 companies.
It's your call
Responsible investment helps people to invest in line with their values and their financial needs. However, investors are hampered by the fact there's no single definition for what can be called 'ethical', 'sustainable', 'socially responsible' or 'socially responsive'.
You might, for example, oppose banks that charge penalty fees (which may themselves be illegal) to disadvantaged consumers, while you have no ethical issue with companies that brew beer, conduct stem cell research or mine uranium for nuclear energy.
Or perhaps none of that matters to you, but you buy into the risk-management argument that 'sustainable' companies - those showing good ESG considerations - are likely to be more profitable in the long run.
Whatever your view, the bottom line is that if you want to take ethical or sustainability criteria into account when investing, you need to find out exactly where your money's going, so you can make an informed choice.
Don't get caught out by the ever-changing industry jargon. You may be able to choose from among 'ethical', 'sustainable', 'socially responsible', 'eco' and 'socially responsive' funds, but what counts is where their dollars are flowing, not the marketing spiel.
Do your research
It's important to do your own research when comparing funds. The RIAA is a good starting point, detailing the investment strategies of ethical and sustainable funds that have been certified through its program.
Another option is to get professional advice (an adviser accredited by the RIAA may be able to help). Make sure your adviser is licensed by the Australian Securities and Investments Commission (ASIC).
The Ethical Investor magazine and website ranks the ESG performance of Australian companies and investment funds. It also covers the ethics of mainstream investment and information on socially responsible finance products.
Principles for responsible investment were developed by an international group of institutional investors, reflecting the increasing relevance of ESG issues to investment practices. The process was convened by the United Nations Secretary-General. Details of the principles and signatories, which include Australian fund managers, are available at unpri.org.
As the definition of an ethical investment portfolio has become harder to pin down, the need for investors to exercise their own due diligence has increased. Some 'ethical' funds include companies that engage in what are generally considered unethical activities, as long as the activities take up no more than a certain percentage of the company's interests. Fund managers should be committed to transparency and inviting investors to take a look at each fund and make their own judgments about whether or not they want to participate.
With full disclosure at hand, it may end up being a trade-off between ethical considerations and financial ones. Choosing the fund that has the right mix for your ethical and financial needs depends on what factors are most important to you.
Positive screening: The fund manager usually seeks out companies that it believes have a positive social or environmental impact. This is called positive screening – a 'dark green' approach.
Negative screening: The fund manager avoids companies that have a negative social or environmental impact. This is known as negative screening – a 'light green' approach.