The concept of ethical investing is on the rise and is now an important option for many personal investors.
There is a growing awareness in society about the impacts our lifestyle and our consumption have on environmental and social welfare. This concern now extends to personal investment and many investors are keen to explore ethical investing.
What is it?
Ethical investing relates to the scrutiny that a managed fund manager places on the selection of assets, in relation to environmental and social aspects. This has resulted in a new sub-class of managed funds known as ethical funds.
These funds employ a sophisticated review process to screen investments and decide whether they qualify to be included in an ethical fund.
Positive and negative screening
In general, there are two methods applied to ethical investment selection.
- Positive screening – where the fund manager is proactive in sourcing companies that abide by high ethical standards.
- Negative screening – which takes a more passive approach based on excluding companies with poor ethical practices.
Beyond these general categories, each fund manager may implement more specific criteria for making selections.
The popularity of the ethical investing movement has led to the formation of an industry body known as the Responsible Investment Association Australasia. This body sets out standards for fund managers to apply in their investment selection process, so that personal investors can have confidence in a fund’s ethical bona fides.
Would an ethical fund suit you?
Despite the layer of extra scrutiny involved, ethical fund performance can generally be comparable to funds without ethical screening, so they can be a worthwhile fund category for many investors to consider.
Your adviser is well equipped to discuss the ethical fund options with you and how they can be incorporated into your portfolio.