9 March 2021

How to do good when you do well

Finance General Practice KnowCents

There has been a growing interest in ethical investing and a more socially focused investment approach in general.

In addition to focusing on investment returns, ethical investing focuses on investing your money in companies, investment projects and superannuation funds that align with your sense of ethics and your beliefs. 

Australian doctors, at every stage of their career, have been part of this change. But the term can often be used quite loosely. What does ethical investing actually mean and how do you get started? 

What is ethical investing?

When it comes to ethical investing, the term usually refers to three types of ethical investing strategies, which are:

  1. environmental, social, and governance
  2. socially responsible investing
  3. impact investing

To understand if ethical investing is for you, you need to understand the difference between the three.

Environment, social and governance investing

ESG considers how environmental, social and governance risks and opportunities can cause material impacts on a company’s performance. They can invest sustainably while maintaining the same level of returns as they would with a standard approach.

The following ESG factors are considered in ethical investment decisions:

  • Environmental factors: climate change, carbon emissions and renewable energy.
  • Social factors: employee wellbeing, product safety, good stakeholder management, and community impact.
  • Governance factors: board diversity (e.g. independence and gender diversity, executive pay remuneration and exposure to corruption).

Which is different from socially responsible investing

SRI actively seeks companies and investments that have a positive social impact, while eliminating or focusing on investments according to specific ethical guidelines. The underlying motive could be religion, personal values, or political beliefs.

Not to be confused with impact investing

Another common phrase used is ‘impact investing’ in which positive outcomes are of the utmost importance. The objective of impact investing is to help a business or organisation accomplish specific goals that are beneficial to society or the environment alongside financial return.

Ethical investors typically use an exclusion framework that filters out companies and investments that don’t meet certain criteria, while highlighting companies that demonstrate good ethical and sustainable practices. This is often referred to as ‘positive’ and ‘negative’ screening and investments may seek to offer an exposure to positive screens, negative screens or a combination of both.

Why are doctors increasingly interested in ethical investing?

There is extensive research being undertaken to determine whether ethical investments provide a return premium. At this stage, it would be premature to confirm or deny; however, there can be other advantages to aligning your investment portfolio with your ethical preferences. 

  • Medical professionals, by definition, have chosen a career path that is based on ethics and helping people live better and/or longer. Ethical investing is attractive to many doctors as, whatever the ethical focus chosen for your investment portfolio, it is safe to assume it will align with most of the personal values of peers within the medical community.
  • As an ethical investor, you may gain increased satisfaction when an ethical holding company performs well; knowing your investment is doing more good or supporting causes you are passionate about.
  • The ripple effect becomes a reality: as more people invest in ethical funds, the investments can grow substantially in the future.

Factors for medical professionals to consider when investing ethically, or considering doing so

  • It is always wise to consider your own ethical investment preferences and ensure they are in line with your personal circumstances and overall investment objectives. 
  • Ethical investment decisions need to be considered in line with factors including your risk preferences, the diversification of your investment, asset allocation and costs. Ethical investing is not a passive strategy, it involves a lot of research to ensure that it aligns with your values and beliefs. This research can be outsourced to an investment professional; however, the onus remains on you to ensure the ethical alignment to your own beliefs are maintained. 
  • In some cases, the fees for ethical investing can be higher due to the research involved in identifying the right investment.
  • Limiting exposure to some investments may decrease the diversification of one’s portfolio. Diversification is a key investment characteristic as investors seek not to have all their eggs in one basket.

How to begin investing ethically

Consider your own circumstances and don’t follow the herd

Choosing where to invest is a really important decision. When considering whether to invest ethically, it’s important to consider other factors including:

  • Your own personal circumstances
  • Your attitude and tolerance to risk
  • Your investment timeframe
  • Your stage of life

Understand what ethical investing means to you

Take a moment to consider what ‘ethical investment’ means to you and what you’re looking to get out of it. Consider your own investment preferences and whether you are seeking to exclude particular investments/sectors and/or include particular investments/sectors and funds/companies.

Do your homework

Before you decide to invest in a company, a superannuation fund or any investment for that matter, do some research to check the accuracy of their claims. Ethical investment is a wide-ranging topic and there are plenty of options available. Don’t get stuck on the front page and sucked in by glossy marketing, make sure the investment provider is very clear about their approach to ethical investing, and who you are supporting with your money.

If unsure, seek advice

If trying to invest ethically is giving you a headache, seek advice from a professional financial adviser. A financial advisers’ role is to help define what ethical investing means to you, to understand the investment options available and if appropriate, work with you to develop an investment approach that speaks to you and that is aligned to your wider financial plan.

If you would like more information about the key steps to take to get started on your ethical investing journey, click here to access DPM’s Ethical Investing Checklist and guide to getting started.

Christian Seeley is a financial adviser (B. Comm (FinPlan), AdvDip FP) with more than 10 years’ industry experience, who specialises in helping medical professionals plan for future lifestyle and financial objectives.

The information contained in this article is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.

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