Month: February 2020

Ethical & unethical investments may not be what you think

Last month, Australia suffered destructive and widespread bushfires.

Debate around climate change, fossil fuels and sustainability heated up as large parts of New South Wales and Victoria burned.

But this debate is not new.

You might have seen the ‘clean money’ ads for Bank Australia, targeting customers who want to know their savings and investments are not funding destructive, unethical business activities.

The idea of ‘ethical’ investing is the idea of aligning your investments with your own ethical code.

In this post, we’re taking a quick look at what makes an investment ‘ethical’ or ‘unethical’.

Before we launch into it, a disclaimer: We’re not trying to tell you what you should do with your money.

(However you choose to invest, we provide a powerful portfolio tracker to help you track and analyze your portfolio.)

We’re exploring the question because we believe it’s beneficial to consider how your wealth building lines up with your personal — and your community’s — values.

So, pour yourself a glass of scotch or herbal tea (no judgment from us either way!) and let’s get into it.

Gambling, Drinking & Sex: Classic ‘Unethical’ Investments  

“A highly developed stock exchange cannot be a club for the cult of ethics.”

— Max Weber, German Economist

You can generally classify unethical investments as those which derive profits and returns from activities that harm or negatively influence people and the environment.

Making money from casino businesses, the sale of tobacco and alcohol, or prostitution are classic unethical investments.

Why?

Because those activities rely on consumers who are — in the case of tobacco — addicted to a significantly harmful product.

And yet, as the great Warren Buffett (who we seem to mention time and again in our posts — see the post that sparked a comment war on social media) says…

The sale of tobacco not only generates high profit margins.

It also cultivates a vast and loyal consumer base that supports business even as regulation and tax drives prices higher.

In other words, what makes that product unethical is the very thing which makes it a sound investment from a purely financial point of view.

As society has become more conscious of peoples’ impact on the planet and climate, the definition of unethical investing has evolved.

Today, you can say that any business that damages the planet is not an ethical investment.

Fossil fuels, logging, mining and other operations that seek to extract value from the earth by plundering natural resources for profit.

Again, though; these businesses can deliver huge returns.

Consider the returns rare earths and industrial metals mining have produced as we’ve moved through the industrial and technological ages.

As the German economist Max Weber pointed out, the market can be a tricky place to practice one’s ethics.

Because generally speaking, we enter the market to make money for ourselves.

But for many investors in the midst of the current generational shift, there are other considerations than simply maximising returns.

Protecting Planet And People:
Modern ‘Ethical’ Investments

“Being an economist is the least ethical profession,
closer to charlatanism than any science.”

— Nassim Nicholas Taleb

Ethical investing largely boils down to the idea that we should not make money from any business that profits from inflicting harm to living things.

People, animals, the environment; these things must be protected and respected at all costs.

So instead of investing in fossil fuels, you might put your money into renewables.

Instead of investing in aggressive property development that impacts the environment, you might invest instead into community-focused, sustainable housing projects.

Or, you’ll park your money with a fund or bank who pledges to manage it in line with a clear ethical code.

You might think that investing ethically would drastically compromise your potential to earn a good return.

But one look at Canstar’s managed funds comparison table and you’ll see one ethical Australian fund is vying with the established aggressive players.

History shows that some of the most unethical businesses — illicit drugs, gambling, mining and burning fossil fuels — are some of the most lucrative.

The way of the ethical investor has tended not to bring such generous returns.

That’s because ethical investing is an attempt to balance the inherent selfishness of wealth building with a broader minded, ecologically-driven attempt to give back — or at least to take sustainably.

But don’t underestimate the shift happening in the economy and broader society right now.

In Australia, you now have options for ethical investing from banking and superannuation through to investment funds and companies that are ‘B Corporation’ certified.

Would you have guessed that an ethical managed fund could offer an annual return within a few percent of the top performing ‘unethical’ fund?

The times they are a changing.

‘Ethical’ Doesn’t
Always Mean ‘Green’

As with most things, the ethical investing debate is not black-and-white.

There’s a grey area.

And it is vast and shaded.

When you break it down, an ethical code is an ethical code.

Whether that code is good or bad is subjective and open to debate between individuals and within the community.

One definition of unethical is any decision that goes against one’s own ethical code.

So if you believe that climate change is not real, that there is no cost to burning fossil fuels and so forth, but you invest in a business focused on planting sustainable forests, you could say that you are making an unethical investment.

Even though the place you’re putting your money is considered ethical based on its actions, your investing in it would be unethical because it doesn’t line up with your beliefs.

The debate around how we make money at this point in history, which businesses and organizations we choose to support, is more heated than it has ever been.

So where do you stand? To what extent do your beliefs inform your investments?

Today, more than ever, it might pay (financially and otherwise) to take a look at how your portfolio lines up with your own ethics.

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Whatever your ethics, understanding how your money is performing in the modern financial market requires a specific set of digital tools.

Navexa provides these tools.

Go here to learn more.