Ethical investment can be defined in multiple ways and is somewhat synonymous with a variety of alternative labels. The phrase “ethical investment” can be used interchangeably at times with others such as “socially responsible investing”, “impact investing” or “sustainable investing”. For our purposes here, we define ethical investment as investment that ‘considers social, environmental, ethical and financial dimensions all together’.
Responsible investment is by no means a new phenomenon. The last few decades of the 1900’s saw the sector grow into its own as a legitimate vehicle for change. By the end of the 20th century, conscientious investors were well versed in decision making which avoided financing business relating to the waging of war, destruction of the environment, and the unethical exploitation of labour. Most recently however, as one might safely assume, responsible finance has been geared towards combating the climate crisis.
In the Australian context, responsible investment has recently undergone an explosion. In Australia and New Zealand, between 2014 and 2016, the total value of responsible investment assets climbed from AU$148 billion to AU$516 billion- an increase of 248%. In Australasia, as of 2018, ethical funds made up 63.2% of all managed assets. Globally, between 2006 to 2017, the increase has been even more significant, with the total value of managed responsible assets climbing from US$6.5 trillion to US$68.4 trillion.
At face value, the popularity and rise in the perceived value of ethical investing is obvious. One might ask the question though, “at what cost?”.
Traditional finance theory predicted at the outset that opting for ethical investment choices would infer a cost, and that sounds reasonable. Who could be blamed for assuming that their money was already being invested in the most optimal way, and that to alter this would have consequences? Fortunately for investors, the present reality and widely accepted consensus is that not only does ethical investment incur no additional cost to the investor, but amongst Australian funds, it outperforms traditional modes of investment over the short, medium and long-term. Internationally, ethical funds outperform their counterparts over the short and medium term, but are outperformed over the long term.
In Australia, not only are ethical investment funds now outperforming indiscriminate funds, but ethical funds are becoming increasingly geared towards active investment in projects and enterprises which directly bring about reductions in carbon emissions or otherwise contribute to averting the climate crisis.
Despite speculation that the current momentum enjoyed by ethical investment might generate a “bubble” of sorts, the United Nations Intergovernmental Panel on Climate
Change recently declared that an annual investment of US$2.4 trillion per year will be required until 2035 (at least) in order to avoid the worst impacts of the climate catastrophe, signalling a great capacity for growth in ethical finance yet.
Overall, as Australia is so well positioned as a future renewable energy exporter and potential world-leader in a revolutionised, green economy, the outlook for ethical investment looks positive. If you would like to learn more about how you can get involved with ethical investing yourself, you join our Meetup group here and sign-up to our mailing list here to be the first to know when the Bloom Investing app will be available!
This article has been written by our Climate Solutions and Sustainable Finance Content expert: Hayden Austin