Want to get into ethical investing? Here’s 5 things to consider first

Congratulations on making the decision not only to invest and build your wealth, but to do so ethically!

Because building wealth doesn’t need to come at the expense of our environment or the people who inhabit it. In fact, there can be solid returns to be made!

As with every decision involving your hard-earned cash, it’s important to do your homework first. When it comes to ethical investing, that homework involves asking yourself these five questions:

1. What does ‘ethical’ mean to you?

The word ‘ethical’ means different things to different people. As such, ethical investing could mean putting money towards:

• environmentally sustainable operations
• fair trade practices – within a business and its entire supply chain
• good corporate governance – anti-corruption, paying appropriate taxes, treating customers well, anti-discrimination, equal opportunity employer
• all of the above.

Decide what ethical means to you, to help focus your investment strategy.

2. Where do the benefits go?

Consider who the end beneficiary of your investment will be and how that aligns with your personal preferences.

Some people look geographically, such as supporting Australian jobs and environments. Or perhaps hyper local within their local community. Others like to support activities in poorer countries with more limited resources.

Alternatively, you may like to invest funds which support particular causes, such as improving education standards, combatting domestic violence, enhancing drinking water, or disease treatment and prevention.

3. Where does their money come from?

Your target investment may not directly be associated with activities you consider unethical. For instance, tobacco, fossil fuel mining, gambling, or animal racing. But they may be backed by others who are.

That could be in the form of doing business with such industries, having partnerships or receiving incentives from them, or borrowing from lenders that also lend to those activities.

Are you happy to park your cash alongside those funds?

4. Does it seem too good to be true?

Nothing is perfect, but sometimes imperfections are hard to find or are deliberately covered up.

Common issues that are hidden in a bid to attract ethical investors include:

• Lack of authenticity. Marketing hype glosses over little or no real ethical actions. In terms of environmental sustainability, this is called ‘greenwashing’.
• Misrepresentations. For example, ‘degradable’ plastics that in practice only break down into microplastics (which are arguably even worse for the environment) or ‘flushable’ wipes that really shouldn’t be flushed.
• Poor back-of-house. Their in-house practices behind closed doors undo the benefits of their public good works.

So, if you’re looking at something with a blemish-free record or not a single criticism against it, that could be a red flag that you’re not getting the full picture.

5. Is it a good investment?

Just because something does good for people and the planet, and has satisfied all your criteria above, doesn’t necessarily make it a sound financial investment.

Ensure it is profitable, has good long-term prospects of delivering strong financial returns, is managed well by experienced and qualified people, and aligns with the level of risk you are comfortable with.

That includes:

• Past performance: Has it made profits or losses? Were profits from core operations or one-off activities like asset sales? What debts does it carry?
• Returns: Does it have a history of paying dividends? How much and how often? Have these dividends grown or reduced over time?
• Purchase price: How does it compare with similar companies/entities? How does its price compare to the same time last year?
• Ongoing costs: Will you be required to contribute more money in future? What costs are involved in managing the investment?
• Taxes: What taxes will you be liable for? And when? Do these wipe out the value of any profits and value growth?

If it isn’t going to deliver you good returns (and has no prospects of doing so in future), then it’s unlikely to be a good investment – no matter how ethical it is.

Perhaps you missed something and need to recheck your calculations. More likely though, it’s time to look elsewhere.

Because you are an investor, not a charity, so your investments should work for you financially. If one doesn’t add up, there are plenty more fish in the sea.