Investing with your values: A guide for consumers and retail investors
People with superannuation accounts or investment portfolios have immense power. With substantial amounts of money invested – such as the $4 trillion in Australia’s superannuation funds (the 5th largest pool of pension assets in the world), consumers are in the driver’s seat when it comes to the allocation of that money to different industries and companies. Our research shows that 88% of Australians expect their super and banking to be invested responsibly and ethically. Similarly in Aotearoa New Zealand, 74% expect responsible and ethical management of their investments, and 59% are willing to move their funds if their investments do not align with their values.
But recent controversies and developments in relation to greenwashing have meant that consumers are also more sceptical of claims being made by the finance sector. 78% of Australians are concerned about greenwashing and they would be more likely to invest in a product that has been verified by a third-party.
This highlights the importance of transparency in financial product labelling and marketing. Terms like “sustainable”, “ethical” and “socially conscious” mean different things to different people and are used differently by financial product providers like superannuation funds and investment management firms.
The good news is that the growing demand for responsible investment options is pushing financial institutions to be more transparent and to improve their responsible investment practices.
Here’s how consumers and retail investors can be active participants and align their investments with their values:
- Engage with your super fund. Ask questions about your fund’s investment approach, how the fund defines key terms like “ethical” and “sustainable”, and what kind of commitment your fund has to responsible investment principles such as transparency, voting at company AGMs and actively engaging with companies you are invested in to improve their behaviour. If the options don’t align with your values, it may be worth considering switching funds.
- Research your bank’s practices. Responsible banks recognise the societal cost of issues like climate change and pollution, even if companies don’t face immediate consequences.
- Conduct thorough research. Utilise resources like the Responsible Returns online tool (https://www.responsiblereturns.com.au/), which lets you search the directory of RIAA certified funds and understand their investment strategies.
- Speak to a financial adviser about ethical investing options. RIAA also certifies financial advisers and advisory groups in recognition of them meeting the required standard for responsible investing products and services.
- For those who want to go further, supporting public consultations and advocacy campaigns on the issues that matter to you is also an option. These activities unite like-minded individuals to advocate for positive change.
Understanding investment terminology
A common question is how a fund branded with words like ‘sustainable’, ‘ethical’ or similar can invest in industries that many consumers would not associate with such terms.
It is important to remember that what is considered “ethical” varies from person to person. To some people ethical investing may mean investing exclusively in renewable energy; to others it may mean investing in a just transition or primarily avoiding modern slavery in their investment portfolio. In fact, RIAA’s research shows that the main issue Australians want to avoid in their investments is animal cruelty.
In deciding which option to invest in, you should look under the hood of the investment product and make sure the industries it excludes and includes, and the activities it undertakes on your behalf, such as voting at company AGMs and engaging to influence company leadership, aligns with your own values.
Another important factor that contributes to confusion is the lack of universal definitions in some areas. Funds should be crystal clear when using terms that may not have a widely agreed definition. If you can’t see a definition anywhere, ask the fund!
As part of the world’s longest running financial product certification program, RIAA certified funds must comply with RIAA’s ‘avoid significant harm’ principle. This means certified products must avoid direct investments in companies involved in the production of nuclear and controversial weapons (drawn from existing UN conventions and treaties), as well as tobacco and nicotine alternatives. Additionally, issuers must periodically report against any sustainability-related claims made by their products.
Debunking myths about performance and returns
There’s a misconception that ethical investing means sacrificing returns. Growing evidence suggests that companies with strong social and environmental practices may also perform better financially. RIAA certified funds have performed on par with, or even outperformed, the average risk-adjusted return of the broader market over various timeframes. (See industry research for more details)
The rise of responsible investment
Responsible investment is booming in Australia and Aotearoa New Zealand. There is over $1.3 trillion in responsible investment assets under management in Australia alone, and more funds are seeking independent verification to substantiate their claims. This highlights the growing demand for, and success of, responsible investing strategies.
By actively engaging with financial institutions, conducting research, and utilising available resources, you can make an informed choice about your investments.
Investment decisions have the potential to create a positive impact. What kind of world do you want to retire into? Embracing the opportunity to align your financial goals with your values can contribute to a more sustainable future.
Disclaimer:
The above content is provided by Responsible Investment Association Australasia (ACN 641 046 666, AFSL 554110) for information purposes and is not an offer to buy or sell a financial product, and is not warranted to be correct, complete or accurate. For more information refer to our Financial Services Guide on the RIAA website. Any general advice has been provided without reference to your investment objectives, financial situation or needs. If the advice relates to the acquisition of a particular financial product for which an offer document (such as a product disclosure document) is available, you should obtain the offer document relating to the particular financial product and consider it before making any decision whether to acquire the product. Past performance does not necessarily indicate a financial products’ future performance. To obtain information tailored to your situation, contact a financial adviser.