Ethical investing: What does it actually look like?

This week Australian Ethical Investment (ASX: AEF) CEO Phil Vernon announced he was standing down after nine years.

During his tenure, funds under management rose from $600m to $3 billion and Australian Ethical Investment’s market capitalisation went from $20m to $200m.

It is clear ethical investing is on the rise and fund managers are taking note. But, what does it actually look like? Is it just avoiding “unethical companies” or only investing in companies seen to be doing good.

Proactively ethical or just avoiding proactively unethical?

Betashares CEO Alex Vynokur told Stockhead the approach of only investing in “proactively ethical” companies as opposed to only avoiding “proactively unethical” was becoming more prominant.

“A number of ethical strategies tend to still invest in companies that invest in companies which are engaging in activities inconsistent with ethical standards,” he said.

“But they’re trying to pick the least worst so to speak — least polluters among miners, least aggressive lenders.”

One of Betashares’ ETFs takes advantage of this strategy – BetaShares Global Sustainability Leaders ETF (ASX: ETHI). Vynokur said this fund, “has resonated strongly with investors”.

And indeed he is correct, hence it is up 20 per cent this year and 46 per cent since its inception.

“I would say why its resonated is because of the strategy. A dark green approach to investing – near enough, is not good enough,” he said.

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“The strategy we are following [with ETHI] is to exclude completely any entities that are engaging in activities inconsistent with responsible investment and positively allocate to companies that are climate change leaders.”

What do they invest in?

According to Bloomberg, the ETF owns one hundred stocks — none in Australia.

Of its holdings, 30 per cent of stocks are in tech and 22 per cent in health. Owned stocks include Tesla, Starbucks and Apple.

Its only “materials” stocks are Swiss perfume maker Givaudan and American construction material producer Vulcan.

Certification

If you read ETHI’s product disclosure statement, you’ll notice the fund is “Certified by RIAA”.

This is the Responsible Investment Association of Australasia, which says this symbol, “provides consumers and industry alike with a quality mark of Australia and New Zealand’s standard for responsible investing products and advice”.

If you want certification, then you’ll have to prove two things. First, the adviser, “has committed to offering responsible and ethical advice to all their clients, is experienced in offering specialist advice, and has responsible investment products on their approved product list”.

Second, the product, “has implemented a detailed responsible investment process for all investment decisions, clearly discloses what that process is, has been audited by an external party to verify the investment process, and has met the strict disclosure requirements of the program”.

Another certification is “Category B”. In the organisation’s own words, “Certified B Companies are a new kind of business that balances purpose and profit”.

“They are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.

“This is a community of leaders, driving of a global movement of people using businesses as a force for good.”

Australian Ethical Investment was the first Australian listed company to win this. Recently, non-listed companies in Australia have also won this including Beyond Bank and tourism group Intrepid.

Australian Ethical Investment has been unable to Stockhead’s requests for comment.