She's On The Money - What is Ethical Investing?

Episode Date: April 5, 2022

On this episode we unpack the complex and very personal world of ethical investing. We talk its history, purpose, the difference between sustainable, impact and ethical investing, how it stacks up compared to other forms of investing and SO much more!We’re so grateful to be working with our friends at Sharesies to create more investing content in 2022. Use the code SOTM when you sign up and you will get $10 in your account ready to invest! Head to Sharesies.com.au to snag your bonus! Terms and conditions apply.The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Infocus Securities Australia Proprietary Limited ABN 47 097 797 049 AFSL - AFSL 236523.See omnystudio.com/listener for privacy information.

Just before we get started, we'd like to acknowledge and pay respect to Australia's Aboriginal and Torres Strait Islander peoples. They're the traditional custodians of the lands, the waterways and the skies all across Australia. We thank you for sharing and for caring for the land on which we are able to learn. We pay our respects to elders past and present and we share our friendship and our kindness. She's on the money. She's on the money. Hello and welcome to She's on the Money, the podcast for millennials who want financial freedom. My name is Georgia King, and as ever, I'm joined by Victoria Devine, financial advisor, our sweet woman all round. Hi, V. Hi, G. Well, are you ready to get into a deep dive,

like a deep, deep, deep dive, where I'm probably going to arguably go off the chain with another rant? Lead the way. Today, I'm going to rant because we're talking ethical investing, Georgia King, which means we're talking ethics, and that is a very personal thing, my friend. Should I be laying on the therapist's couch for this one? Oh, like you can, if that makes you more comfortable. The audio might sound weirder, though. Yeah, if you're like, laying down. Like in all seriousness, why do things get personal when it comes to ethics? Because ethics mean different things to different people. Like I'm a little crazy person who's

plant-based and doesn't want to drink milk and only drinks oat milk and all of this other stuff. But then other people would be like, no, that's completely ethical. And that is so fine in my books. And it's not about judging each other's values. It's about going, okay, what are my values so that I can then overlay them onto what I'm going to do in the investing world. And you'll find out later in this episode a bit more about what I believe is and isn't ethical. And it's not necessarily saying you have to cookie cutter copy me. You have to have these ethics or it's not okay. It's more saying, well, what's the scope of what you're willing to take? Because unlike George, you're going to the supermarket and being like, all right, well,

I'm going to head straight to the organic aisle because I know that the produce that have the organic stickers on it have passed a whole heap of guidelines to be called organic in Australia. Ethical investing is nothing like that. It's kind of like the wild west and they kind of do whatever they want. And there's, as you know, because we've talked about this topic in passing before on the podcast, there's things like greenwashing where people are using words that make us think it's ethical, but then it's not. And it's just kind of rude. Is it worth prefacing that we have done an episode on this before? Yeah, we totally have done an episode on this before, but like there's no such thing as too much investing content, Georgia King.

Well, that's exactly right. So today we're going to unpack exactly what it is. We are going to talk about investing ethically, what sustainable investing is opposed to ethical investing, or what impact investing is. And of course, G King, we're going to talk about what your values are, not what your personal values are, but like give you some guidelines on how to work out what your personal values are so you can make decisions that are in line with them. Exactly right. Because what's ethical to you or I will be different to the listener. Exactly. Ethics, though, have not always been a consideration when it comes to investing. I don't know if that's because we're more socially conscious now or what that is. I mean, you said on last week's episode that younger

people are investing more and more. They are geniuses. Exactly right. How rich are we going to be like as a whole community if we're all investing when we're younger and if one person put themselves in a position where they have a million dollar portfolio. Imagine like on scale like there are 200,000 people in our Facebook community. Imagine if they all did it. That's 200 grand we didn't have yesterday. Exactly right. Take over the world. Go. But in terms of ethics this wasn't a thing. It's like relatively new. Not on a public scale. Like I feel like there were those people that were super interested in it, but it definitely wasn't ever an investment consideration until recently. So there's obviously a really long history of it. Some say it dates

back all the way to the early 1900s in the USA with the Methodist Church actually, not that ethical investing is religious, but with the Methodist Church deciding that it wasn't a form of gambling to invest in the stock market, but only doing so on the basis that their money wouldn't companies involved in alcohol or gambling or weapons manufacturing. And that became the basis of what, quote, people today refer to as the core base of ethical investing, right? So fast forward to the Vietnam War, G, and the early wave of public demand for ethical investment in companies who weren't profiting from that war. And then the 80s, the apartheid movement was the catalyst for the UK's first ever independent research service for ethical investors. That's pretty cool. And

then these days, ethical investments now account for, gee, wait for it, 40% of the country's professionally managed money. And that's over $1.28 trillion accounting for 40% of every professionally managed dollar. In 2011, gee, it was only $168 billion. How's that for compound growth? Wow. She's thriving. So is that because of compound growth or because more people? No, It's because more people are interested in it and joining in. Like, sadly, compound growth doesn't happen that significantly and that quickly. I wish it did, though. That would be nice.

Imagine if in 10 years you could take your money from being $168 billion to $1.28 trillion. The dream. I don't even have a billion dollars to start with, not even like one million. We're screwed. And I don't know what a trillion is. Bea, how does Australia compare to the rest of the world in terms of how much we ethically invest? Well, arguably, I'm quite biased, so I think Australia is better than most countries, but we are definitely mirroring a pretty global trend with $48 trillion, which equates to

around 36% of the world's professionally managed money and is backing responsible investment. And, gee, 83% of Australians now expect their money in their bank accounts and their superannuation funds to actually be invested ethically and responsibly, while 80% expect their savings to have a positive impact on the world. How nice are we as a country? Well, we are nice. I don't want to get political, but it's very interesting that we're all very interested in ethical investing,

looking after the environment, yet our government continues to let us down. Okay, yeah, that's a bit political. A little bit of a downer, but it's topical at the moment. A bit savage for this show. But also, yes, absolutely, it's super topical at the moment. Okay, so aside from concerns that the world is going to hell in a handbasket, which, let's be honest, it really is. It's a throwback of a caption.

Did you like that? My grandmother. What might be some other motivations for this rise in ethical investment be? Well, I think like most things in life education, we know more, we've learned more, we've done more, we have access to more information and research. And I think we now just expect better because historically we weren't sure of our impacts on the world. We weren't sure of, you know, how much of an impact eating meat has on the world. But it's one of those things where people are now looking for personalization and the finance and investment world are a consumer product and I

think that it's important that we align that to our values and more so aligning it to our values because if you think about it if you're making money it makes me relatively uncomfortable not even relatively it makes me incredibly uncomfortable to think that my future wealth and my future financial security will come from the detriment of others like I just don't want that to be the case and I'm sure you guys are the same and I think I've said as well on the pod before but if you're a client listening you absolutely know this but my financial advice company will only invest ethically because I'm very much of the belief that ethical investing is the way of the future like I think it's all about sustainability and creating a sustainable world for everybody

and I just don't think that unethical investments are a part of that and it's not to say we don't hold things that, you know, we have a couple of clients that do definitely hold oil companies, but we've discussed this, it's aligned to their values, but those oil companies are actually investing significant amounts of money into the future sustainability of the energy sector. And I really respect that. So I think that there's also this balance of, well, do you just not invest in that sector at all? Or do you invest in the companies that are trying to do good and pivot and changed because, you know, I don't think any company ever started. I'm like, you know what, I'm going to be a coal mine because I want to ruin the world. Like they didn't do that. It's

because they didn't have the education at the time. And I think that sometimes it's really nice to go on that journey as well, as long as you're comfortable with it. But it's all about education, not necessarily boycotting companies that don't align to your values. So are there any other motivations, V, for the rise in people choosing this way of investing? So did some research or you did some research and gave me the statistics. Cheers. Actually, that was Annalisa. How good is this? We just rocked up and got a list of statistics. And she's probably looking at us going like, you're not reading any of them. You're just ranting. So, G, the RIAA, which is the Responsible Investment Association of Australasia, they've actually reported that 74% of Australians

said that they would consider moving to another provider if their current fund was investing in companies that were engaging in activities that were inconsistent with their values. I kind of love that. Like I love that people know their values, which has risen to 87% for Gen Z, so those peeps between the ages of 18 and 24, and 82% for millennials. That's people over the age of 25, which is very nice. But it's also really important to understand that world events are also highlighting the way that your money can be tied up in things that you don't want them to be. So for example, I had a question recently come into the She's On The Money inbox and they said, oh my gosh, Victoria, please help. I've just reviewed my superannuation portfolio and they

own a Russian oil company and I'm freaking out and that's really scary. And do I need to change super funds? And I was just like, please just sit tight. Like all of this was only just unfolding. I guarantee you the fund manager of your superannuation portfolio is just as worried about that, arguably, if not more, because they could obviously lose a lot of clients and have a lot of blowback for something like that. But I think if you're looking at stuff like that, see what the company is going to do about it before jumping ship. But again, obviously, Russia, a few years ago, would you have been worried about investing there? Absolutely not. There were a really strong country that had really good things going on. Now, today in 2022,

too, as we were recording this podcast, it's actually illegal to invest in Russia. Really? Kind of scary, but also that's just to protect us. Like what if you didn't know? So it's putting people in the best possible position because obviously it's way too risky, but also we don't want to be funding war because that's ridiculous. So why is that? Is that to protect us to punish Russia a little bit? I think it's the world trying to, or Australia in particular, because like I'm sure that there are other rules and regulations around the world that don't apply to us, But it's the Australian government, I guess, pulling out of Russia and saying, we don't support this because by allowing Australian citizens to invest in another country that

is doing the wrong thing, it's saying, you know, underlyingly, we might not have said it, but we don't not not support you. Very interesting. I think it's smart. I think it's really impressive. Obviously, there's going to be a massive shift in the markets for people having to sell down their assets or change it or, you know, maybe not being able to realize investment strategies they had.

But that's not the worst thing in the world. but obviously that's front of mind and on the front page of the newspaper and we see it and we understand it and it's something that we're like yeah of course you wouldn't invest in Russia but what about all those things that aren't making the front page of the newspaper like how do we find out about those and how do we know that they actually are happening and that we are okay with them or not okay with them I think that's the question we need to be asking. Absolutely and we will dig more into that on the other side of the break. Fee let's talk about the returns on ethical investing? Because it sounds amazing on paper. We all want to make the world a better

place, but can we still make bank? Absolutely, we can make bank. We can absolutely make bank. I've got a couple of colorful opinions on this, but first I'm going to drown you in statistics so that the rest of it makes sense, right? So Morningstar, which is actually a research house, or we call them research houses. It's a company that does investment research and a lot of financial advisors rely on that research to make investment decisions for their clients. But Morningstar recently examined 745 sustainable funds and then they compared them to 4,150 traditional funds and they found that they matched or beat returns in all categories. So this isn't costing you any more money. Like it's not going, oh, okay, you're

compromising something by picking something that aligns to your values, therefore you're going to get lower returns. No, sir, that is not the case at all. And I think that is a really common misconception that by being an ethical investor, you're not going to get such good returns. I just really wanted that to be in the podcast so that you guys know that actually following your values and aligning to something that is more ethical and is more sustainable is actually going to be more profitable long-term. And gee, over a 10-year period, the average annual return for a sustainable fund invested in large global companies had an average return of 6.9% per year, but those traditionally invested

funds had an average return of 6.3% per year. So like, I mean, it's not that big of a difference, but like the ethical is coming in on top. We love that. I think it's really important to talk about this stuff as well, because I think so many people are genuinely like, I don't want to invest ethically yet. I don't want to change. I don't want to do anything. it's going to compromise my financial future because you feel like there has to be a trade off, right? Whereas that's not the case. But the thing I do want you to be really aware of is the fees. I feel like there's, you know how we talked about pink tax? I feel like there's potentially a green tax. Can I call it that? I don't think I've ever heard someone, we're going

to call it the green tax, where people are adding additional fees and additional charges and management fees and admin fees to funds that are more ethical. And whilst I completely understand why in the grand scheme of things that they exist. So for example, obviously just an example I'm pulling out of nowhere, the Vanguard Ethical Fund is more expensive to invest in than their normal fund for ETFs. And that's okay because I do understand comprehensively that there is far more research and understanding and background checking and balancing that needs to be done on an ethical portfolio, we get that. But what I see with their fees is that they're reasonable for the amount of additional work that goes into ethical investing. But when you look at other

companies, and I've spoken about this on the podcast before, where they're like, oh my God, we're a super fund and we're super ethical and we're all for women and we do this and we do that. Like I genuinely think that some of them are taking the piss, Georgia King, with what they are trying to sell us because it's like, yeah, okay, so your woman only focused one, great, it's ethical, great, all of this other stuff, but I can go buy something else. Like if you were looking at an ETF or a different super fund, I can just go into an ethical portfolio in a pre-existing superannuation fund. It's not going to cost me anymore, but I'm not paying that dumb pink or green tax you're adding because I want my values to be upheld. So I just feel like,

especially in this industry where a lot of us feel overwhelmed when it comes to talking about superannuation or investing or making the right decision, I think we've started looking for companies that have marketing that really appeals to our values so you go oh my gosh like they've absolutely posted everywhere that they're ethical and they're for women and i'm a woman but like genuinely george what the hell is the difference between investing as a man and a woman apart from the fact that uh i think we will only be able to invest 73 cents in comparison to their men's dollar but whatever that's not the case at all it's more what is the different management strategy and why as a woman should I be paying more for your woman's super fund?

Yeah. So there's like these little extra taxes that we are paying. But then, so there's also a concept of greenwashing when it comes to ethical investing, right? So how do we know that what we're investing in is legitimately ethical or if it's just has the fancy marketing? We need to look at the underlying investments and understand, as I was talking about before, you know how I talked about the organic sticker in the fruit shop? Yes. It is not like that, unfortunately, and they mean all different things. So you just have to be really cautious when looking at an asset and going, oh my God, but it says it's green or it

says it's ethical or that's the Emerald portfolio or that's the whatever portfolio they're calling it. I think you really need to talk about what that means when it comes to ESG investing. And there are a few things around that that are important to wrap your head around. So ethical investing is more about your thoughts and your feelings and your personal beliefs. Sustainable investing is a strategy where investments are concentrated in companies that have sustainable business practices. And a really good measure of that is ESG investing, which you've probably heard historically being thrown around. I think we've spoken about it in passing, fleetingly, Georgia King, on the podcast before. But that is an acronym for environmental, social, and governance.

So those are the three key pillars that they are measuring ethical investments on or sustainable investments on or however you want to articulate them. So companies that employ what we are calling in the investment world an ESG focus look at the sustainability side of things. So they look at the environment, they look at the diversity and inclusion and positive social impacts. They then look at the social side of things and making sure that their employees are well looked after and paid and they're not, you know, shipping off all of the work overseas and paying them below minimum wage and, you know, absolutely making fun of it, then they're also looking at the governance of the business. So are they doing the right thing by the business? Are they doing the right thing

by the shareholders that own shares in the company? And are they overarchingly doing the right thing? So personally, I love the idea of ESG investing because it gives you a bit of a measure. Like you can go, okay, cool. Like what are those three things and how does this stack up? So don't just look at the shiny label and go, oh, but it's the green portfolio. Because George, I could go out tomorrow and I'm sure someone else already hasn't, I'm probably going to get sued for saying this, but I could go out tomorrow and register a company called the Super Green Super Company. And you go, wow, so cool. Like that sounds ethical. That sounds good. And then I could just buy oil companies because green's actually just a color and I can do whatever I want because

it's basically the same as calling it the Super Pink Super Company. So I think it's really important to know the buzzwords, but then also have that backing in ESG and go, okay, cool. Like what are the environmental impacts? What are the social impacts? What is the governance of this company like? And then G, the next thing I want you to understand, not just you, everybody listening, because we love them just as much as we love G King, is impact investing. And impact investments are investments that are made with the intention to generate positive, measurable, social and environmental impact alongside financial return. So impact investments are kind of the investments that you make with the intention to just like do good and be good and be a good egg and have a

really solid impact on the world. Like investors who are putting their dollars into impact investing and investing in this way are actively looking to support areas that they care about. And some really big ticket, I guess, people who are doing this are people like Bill and Melinda Gates and you've got warren buffett or buffet or however he's back him and his like lack of financial creep are back because he's spending all of his money on impact investing so it's giving back it's like that philanthropic vibe where you want to give back more than you're receiving but you also want to make money so you can have a long-term impact so it's like maybe you'll get a return like that would be nice but that's not really no no you absolutely are getting a return but you're

specifically choosing companies that are going to have a good impact on the world. So it's not just measuring them and going, are they ethical and doing the right thing? Like you could go to a company and be like, oh my gosh, you're producing shoes. You are doing it in an ethical way. You've got shoes that are good shoes. They're not made of leather. They're made by people who are being paid a living wage and you have really great governance. You have really great internal policies. You've just got this really great shoe company, but that's not really making an impact on the world. Whereas you might go, oh my gosh, there's this shoe company and for every shoe that is sold, one gets donated to somebody in need. So that's, I guess, a very simple way of distilling

down the difference between going, okay, well, what's impact investing versus ethical? Impact investing is usually ethical, but it's that overarching additional benefit of also having a positive impact on the world. So on impact investing, Vee, I'm so happy for our boy Warren Buffett. And his lack of lifestyle creep. That he can invest where he wants and make the difference he wants. He probably doesn't buy takeaway lattes like we do. Well, he probably doesn't. Probably doesn't have much fun either, honestly. Party pooper. What are you doing, Warren? Anyway, Warren can invest in whatever he wants. He can change the world. Have a big impact. But me, I'm just a girl. I've got a thousand dollars to invest. Yes, sir. Can I truly have an impact if

I'm only investing that much? Or am I better off just like popping it somewhere where I'm guaranteed a hot return? Honestly, just chuck it in an oil company. We're all screwed. You're welcome. Goodbye. No, you can absolutely have an impact. And I don't think that we need to compare ourselves to these big name impact investors to think that we're not having an impact. I think that it's really important to consider these things over the long term. I think it's important for you as an individual with your first thousand dollars making a decision to go, is this aligned to my values? Is this something that I want to do? Maybe you do choose a company that's having a positive impact on the world. Lots of companies are now choosing to add

these types of things into their business models because they know that's what investors want. They know that's what the world wants, but it's not necessarily about you and your thousand dollars. Yes, you're putting it there and yes, it doesn't feel massive, but it's about the community. It's about lots of people doing that. And the more people that are on board with that, the bigger that mountain becomes. So think about you and your thousand dollars. Gee, 1.2 million people listen to this podcast. Imagine if they were all putting their money where their mouth is. Like we can have as a community a massive impact on driving a shift when it comes to our expectations around how companies treat people and what they do and the

impact that they have. So it's good that you're thinking that way, but I would hate for someone to be disheartened and be like, oh, my thousand dollars doesn't have an impact. It does because there are so many other people just like you trying to make that right decision. All right. I'm going to pivot a little here, V. It's time to chat about eggs. I love a good egg. Do you actually? No. No, you're vegan.

No, but do you know what? Whenever I go to the cafe, I do buy Lucy an egg and she gets a little poachy at the cafe. A little poachy, if you don't mind. Yeah, she's a little poachy. Sometimes they bring her a fried one. I don't really like that because, you know, oil, dog, it doesn't really mix. But yeah, what's your egg question? So it's eggy and it's ethical. It's a moral dilemma. It's a moral dilemma.

I'm going to put it to you. All right. You're going to tell me your thoughts. Do you, if you're not vegan like me, you're going to the supermarket, do you pick the brand that is small, free range, et cetera, knowing that your dollar is going directly to a totally ethical organization who have never had cages? They're doing great work out on the farm.

So that's option 1V. or is it better to choose the bigger brand the brand that has cage eggs but they also have a little free range egg option oh what are you doing this is a dilemma is it better to choose the free range eggs because then that will encourage that corporation to make a move to a brighter future for the chickens does that make sense i feel like they already know they should be doing that if they have a free range line like they know people don't want their chickens to be treated like trash but maybe they don't know how much money they can make from it because at the end of the It's true. The free range eggs are more expensive. I'm happy to pay for pasture raised. Really

important. I don't know. I think I like the idea of supporting companies that are holistically doing good. But again, it's kind of about supporting companies. Again, your values, G. It doesn't matter what you choose. It's more about are you happy with the choice that you are making? And sadly, you know, I wish that cage eggs were illegal because I think it's absolutely disgusting. This isn't a pet podcast. It's not like she's on the barn. She's in the barn. She's in the barn. She's on the barn. Like, it's just not what I, she's on the farm. That's better. It's not about that. It's actually about like, what are you most comfortable with? And if I personally was buying eggs, I would want the company to be entirely kind to its chickens.

Whereas if you're buying a free range egg from somebody who still has caged chickens, they're still underlyingly treating their chickens like trash. So for me, I would do the 100% free range egg company and my favorite egg company. I didn't even know I had a favorite egg company until now. You know, there's Josh's free range eggs. Yeah, I've seen Josh. He's so cool. Josh's rainbow eggs, I believe they're called and he's like 100% ethical and they're all like pasture raised. Anyway, he looks like he has a really fun time. Bless him. We're not sponsored. Like he's He just sounds like a really cool human. Another egg brand is Lil's Yokey Dokey Eggs down on the peninsula.

Amazing. Lil's Yokey Dokey Eggs. Is that your friend, Lily? No, no. It's actually a really long and sad story, so I won't go into it. But if you can, support them. They're amazing. Oh, so sweet.

Look them up. Maybe we'll link in the show notes or something. We'll link in the show notes to the egg company. Absolutely. This is so not in line with my values, but I'm glad it's in line with yours. Okay, Vae. So when it comes to ethical investing, what do we do? where do we look if we are just starting out on this wild, wild adventure? There are a lot of

places you can look. Google's your friend. Obviously, we've got blog posts and links to a whole heap of resources. There are a million different places you could look and most investing platforms these days have ethical options or ESG options. Just look it up. Sharesies, this isn't a sponsored mention. It's just they have a good amount of resources on their website for you to understand the decision making around what is going to be in line with your values or not. Also, shameless plug to Six Park, who I obviously work incredibly closely with. They have a sustainable portfolio, which I adore, and I think they're doing really good things with, and a whole heap of resources on their blog for you to absorb and learn from. But then I also

think the last thing I want to leave you with before we run off and grab another oat latte, G King, is that you're not going to lose by ethically investing. And I think so many people are of the opinion that it's like the compromise and like, oh, the ethical one, you're not going to get as good a returns. Like in this episode, I gave you the facts to prove that that is not the case. And you can do even more research on your own to figure that out. I think you just need to be smart about it and pick things that are aligned to your values. And you need to do that sooner rather than later. So take a little moment to really reflect on what you are actually passionate about, what is ethical to you, what that means to you. Yeah. And I think we're done.

Full stop. End of story. See you later. Do you want to do the wrap, Jiki? Oh, yeah, yeah, yeah. Okay. The advice shared on She's On The Money is general in nature and does not consider your individual circumstances. She's On The Money exists purely for educational purposes and should not be relied upon to make an investment or a financial decision.

Maybe make an ethical one, though. Yeah, well, exactly right. And we promise, guys, Victoria Devine is an authorised representative of In Focus Securities Australia, Proprietary Limited ABN 47097 797 049 AFSL 236523. And my friends, we would love it if we could see you join our Facebook group where our community shares money tips and tricks every single day free of judgment. Search She's On The Money on Facebook and join us. And if Facebook's not your thing, that's okay. You can also find us on the gram. We're at She's On The Money AUS. And

obviously, don't forget to rate, review and subscribe because we're quite clearly your favourite podcast. That would be nice if they did though. So nice. See you soon, guys. Bye, guys. Thank you.