Ethical investing has been gaining ground in recent years due to growing environmental and geopolitical concerns. But what ethical investment options are available for investors here?
Can you really earn money while doing good? A rapidly increasing number of investors seem to think so. In recent years, ethical investing has gained traction due to the negative impact that industries have on the environment.
Concurrently, concerns regarding dubious business practices and employee maltreatment have been growing. These factors allowed ethical investments to evolve rapidly during the same timeframe as investors sought to expand their portfolio.
Initially, investing ethically simply meant excluding sin stocks from your portfolio. However, that clearly isn’t a one-size-fits-all solution. Today, ethical investing is a lot more sophisticated and there are multiple asset classes that address a wide range of environmental and social concerns.
This strategy doesn’t entail a sacrifice in returns either, with global research agency Morningstar discovering that sustainable funds have been generating 6.9% annually compared to 6.3% for a traditionally invested one.
If you’d like to get started on investing ethically, here are three options that you can consider:
1. Green bonds
|Investors can profit while contributing to environmental efforts
|Higher costs due to additional audit expenses
|Market has considerable growth potential
|Untested because it's a relatively new financial instrument
|Opportunity for investors to diversify portfolio
|The definition of 'green' differs from organisation to organisation
Also known as climate bonds, green bonds function identically to regular bonds. However, the money raised for this particular fixed income instrument goes solely towards environmental and climate projects. In Singapore, DBS issued its first green bond in 2017 and reported that proceeds will be used to finance green assets and projects.
These include green buildings, sustainable transport, and renewable energy. DBS also acted as the lead manager and bookrunner for the National University of Singapore’s first green bond in 2020.
On a global level, retail and institutional investors have put their faith in green bonds ever since its first issuance by the World Bank in 2008. A decade later, US$500 billion (S$671.4 billion) worth of these bonds have been issued and the number is only expected to increase as investors become more cognisant of environmental concerns.
Governments have been encouraging institutions to issue green bonds too. Locally, the Monetary Authority of Singapore’s Sustainable Bond Grant Scheme is set to last until 2023. It allocates $100,000 or 100% of the eligible expense per qualifying issuance for both first-time and repeat bond issuers.
2. Ethical Investment Funds
|Performance is starting to gain parity with traditional investment funds
|But fees are still higher due to additional research and less assets to choose from
|Transparency is often high in order to maintain legitimacy
|You might end up becoming more concerned with ethics rather than performance
|Cost of investing is decreasing due to the increasing number of funds
|Your fund might not be diverse enough
Investing in an ethical investment fund is much like putting your money in a regular exchange-traded fund or mutual fund. Technological advancements have made things much easier for budding ethical investors to boot.
Digital platforms and tools allow you to get started in a jiffy, but do take note of their regulations and restrictions before you sign up. Robo-advisors have hopped onto the bandwagon as well, crafting portfolios that either include ethical investment funds and/or socially responsible companies.
On the local front, Endowus has unveiled a series of ESG portfolios for clients to invest in. From a fully equity-focused one to a solution that's 100% fixed income and everything in between, the robo-advisor aims to cater to investors with varying risk appetites.
Before investing in an ethical investment fund however, do your research to determine which resonates best with you because each investment fund is ethical in its own way. For example, faith-based funds adhere to the principles of their respective religions.
This means that funds based on Islamic values avoid investing in sin stocks like adult entertainment, alcohol, or gambling. Other funds might purchase stocks and shares in companies that have excellent corporate governance and ethics instead.
As a result, you need to determine what you deem as ethical or socially responsible. Putting your money in a fund based on religious values might not make sense if you’re agnostic.
Therefore, parking your money in an environmentally-focused or socially responsible fund might make more sense. This is an extra step you need to take when researching, but one that will be worth your while.
3. Directly investing in a company
|You feel good when the company you invest in does well
|A large amount of research is required to determine which businesses are suitable
|Potential for a huge payday down the road due to changing consumer preferences
|Potential for a moral dilemma when a firm boasts both ethical and unethical business practices
|Functions identically to traditional investing
|No guidelines for a company's ethics or sustainability report
Akin to regular investing, there are two ways to go about this. Firstly, you can purchase a listed company’s stocks and shares. From there, you can either trade these or hold them and earn dividends from the business’ annual performance.
Secondly, you can invest directly in a start-up or SME with a business model that you resonate strongly with. These can include companies manufacturing solar cells or a certain electric car company who has been on a roll in the stock market.
On the surface, this appears to be the simplest option among all three listed. However, a large amount of research is required to determine if a company’s business practices are truly ethical. Said electric car company has been called out for unsustainable labour practices despite its business model being innately ethical.
Compounding this dilemma would be your own standard of ethics yet again. For example, an organisation might be thriving with regards to sustainability. However, it’s said to boast poor racial and gender equality practices. How do you make a decision then?
Furthermore, companies themselves can exaggerate or falsify reports. Case in point: Volkswagen’s ongoing sustainability scandal was preceded by its supposedly stellar annual report in 2014 before multiple investigations discovered fraudulent claims and practices.
It’s on you to trust your gut and do your due diligence to determine whether a company is worth investing in.
Things to consider
In ethical investments, it’s paramount to ensure that your portfolio is curated to align with your personal values and beliefs. However, practical concerns must be taken into account because you’re making an investment, not a donation.
You need to calculate the fees of the fund or platform that you would like to invest in. These should not come close to outstripping your returns.
For example, Australian retail superannuation fund Future Super has been discovered to charge relatively high fees despite investing largely in just exchange-traded funds and fixed securities.
These charges include an annual membership fee, an administration fee, and an investment fee. In total, an investor with AU$50,000 (S$49,078) in this fund can expect to pay AU$688.60 (S$675.91) per year.
Additionally, the company or fund’s performance till date, along with their business model, are key data points that you should be looking out for. It means little if a company is ethically strong but presents a weak balance sheet.
Personal values are indeed the focus of this investment strategy, but you should still apply the same level of rigour when researching ethical investment options before parking your money in them.
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