Ethical investing, also known as socially responsible investing (SRI) or sustainable investing, is a strategy that aims to generate financial returns while considering environmental, social, and governance (ESG) factors. It has gained significant popularity particularly for high-net-worth families as they have become increasingly interested in aligning their investments with their values. Ethical investing is complex and highly nuanced. There are many issues high-net-worth investors need to consider.
Firstly, before starting to invest ethically, it’s important to identify your specific values and priorities. This will define your approach to your ethical investments as what is considered ethical by one person, may not be so, for another. Ethical investing has many nuances that need to be discussed, for example how do you feel about testing on animals for cosmetics? Does this view change if it relates to medical research? In a broader family group, you need an agreed strategy to ensure that everyone’s views are accounted for.
You need to establish investment goals and objectives. Determining your investment objectives, such as capital preservation, income generation, or long-term growth will enable you to start contemplating which types of investments may meet your needs. Ethical investing does not have to sacrifice financial returns, but it’s essential to align your investment goals with your ethical considerations.
You need to decide on your approach. We think of this as how green do you want to be? Some high-net-worth families are happy to invest in all sectors but prefer to invest in the “least worst” option in each sector. For example, they will have an exposure to mining but may choose the one with the least environmental impact or lowest emissions. However, other high-net-worth investors will exclude mining companies all together and won’t even consider them for investment. This approach is called a negative screen. Some families may choose to deploy a positive screen for investments giving certain investments extra kudos for positive qualities such as low carbon emissions or gender diversity. Some high-net-worth investors like prioritise investing for social impact. This raises the questions of what impact do you want to create and how you would like the impact of investments measured.
You need to be aware that ethical investing may impact your returns relative to the market. This could occur when a sector you may have screened out, such as mining performs, particularly strongly and you do not have has any exposure to that sector due to your ethical considerations. This means you did not generate the same level of returns as the broader market. This is particularly true of the Australian market as mining is a very large sector in our stock market index. This is a risk you need to be aware of and comfortable with if you choose the ethical investing path. However, on the plus side it has been proven that ethical investing need not reduce returns in the long term.
You need to decide on your level of involvement in making your ethical investments. Do you wish to work with investment managers who align with your values and manage the investing and advocacy on your behalf? Or would you prefer a high level of engagement through direct investments? Or a combination of both? As a high net worth investor, you have the opportunity to engage with companies and exert positive influence. Consider using your position to encourage responsible practices, transparency, and progress on ESG issues. Shareholder advocacy, proxy voting, and dialogue with company management are avenues for active engagement.
Reporting is another important part of ethical investing. You need to regularly assess the impact of your investments on the issues that matter to you. Look for investment managers who provide clear reporting on the environmental and social outcomes of their portfolios. You need to monitor progress and consider adjustments to your investments as needed.
Ethical investing is a personal choice, and different families may have varying priorities and approaches. Creating an ethical investment strategy that is bespoke to your family, will ensure you consider all of the above issues. A written ethical investment strategy will give you the framework and structure by which you make your ethical investment choices and ensures you align your values with your investment outcomes. If you would like to know more about ethical investing for high-net-worth investors, please contact us here.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
General Advice Warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. We strongly suggest that you seek professional financial advice before acting.
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