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The Complete guide to Ethical Self Managed Super Fund: How to make an impact in 2022

Updated: Nov 3




Quick Facts

What’s the difference between ESG, ethical investing and impact investing?

  • Ethical investing: This is a very broad concept, encompassing any strategy that applies an ethical lens to picking investments. It could be as simple as not investing in tobacco, it really depends on which companies and industries you consider “ethical”.

  • ESG: Environmental, Social and Governance investing. In simple terms it’s the process of assessing companies based on the good (or harm they do) to our societies and environments. Once a company’s ESG credentials have been assessed, investments are moved towards those that have a more positive ESG ranking.

  • Impact Investing: Both ethical and ESG investing usually centre around negative screens – i.e. avoiding tobacco, or avoiding companies with a poor ESG rating. Impact investing takes things a step further by actively investing in assets that have a positive social impact. Think of it as a “do good” approach, compared to a “do no harm” approach.

Why invest your Super Ethically?

We know money makes the world go round, and how we choose to spend and invest that money can have significant real world impacts.


If you have a Self Managed Super Fund, you might be considering how you can use that money not just to generate returns, but to make a positive impact as well. There’s a lot of myths and assumptions about ethical or impact investing and we’re here to debunk them.


Read on to learn how you could use your SMSF to drive change.


If I align my investments with my values, will that lead to worse financial returns?

A recent study by NYU Stern Centre for Sustainable Business and Rockefeller Asset Management, found that:

  • 58% of the 1,000 research papers they analysed showed a positive relationship between ESG and financial performance.

  • ESG investing appeared to provide more downside protection, especially during social or economic crises;

  • Managing investments for a low carbon future may lead to improved financial performance.

In terms of positive screening and climate impact investing, the performance has also been good. Of course past performance is never an indicator of future performance, but we do know that the Deloitte Cleantech Index report (DACT), (which tracks and reports on Australian listed cleantech stocks) has seen 71.5% growth over the last five years, compared to just 36% growth for the ASX200.


The Deloitte Australian Cleantech Index showing the DACT performance when compared to the ASX200 and the Cleantech Index

What is Climate Impact Investing?

Climate impact investing involves aligning your investments with a positive climate future. The recent Intergovernmental Panel on Climate Change (IPCC) reports has outlined the need for urgent action across all levels of government if we are to keep global temperature rises below 1.5C.


Investing with a climate impact lens involves considering:


How to avoid

  • Climate risk: Before investing, ask yourself how a global shift towards net-zero and increasing global temperatures will impact the potential investment. For example, insurance companies are likely to face greater claims from catastrophic climate events. Insurers that are not actively preparing for this, may be less profitable in the long run.

  • Stranded assets risks: This risk applies to those investments/ assets that are likely to lose value as we shift towards net-zero carbon economies - think coal and gas companies.

How to seek out:

  • Those investments that will most benefit from the race to net-zero, which is going to have a profound effect on private and public sectors, supply chains, trade and consumer choice.

Is it possible to have a diversified portfolio using Climate Impact Investing?

Many people think of an investment in the ASX200 as a diversified investment. However the ASX 200 is made up of 24% Materials companies (predominantly miners) and 29% Financial companies, most of whom lend to the material companies. Unfortunately the ASX200 does not offer industry diversification. There is also the risk that the resource heavy index will be negatively impacted by the shift in the private sector limiting financing for fossil fuel projects - particularly thermal coal. In other words, mining companies, who were once the foundation of the ASX, are at serious risk of losing value.


In 2020, an Australian Institute study found that over the last ten years, the Energy segment of the ASX 300, which includes some of Australia’s largest coal and gas producers, were the worst performers, significantly underperforming the market.


The world energy mix is shifting to low carbon alternatives:


Graph showing global projected energy mix in 2018 and 2050

And as the world decarbonises, Australia is presented with significant economic opportunities. We have an abundance of the raw materials required for low emission technologies - like lithium, cobalt, copper and nickel, and of course our environments are perfectly positioned to harness the energy of our sun, oceans and wind.


This new clean energy future, provides Australia with a unique opportunity to become a renewable energy superpower within the next 30 years, which in turn presents ethical and potentially lucrative investment opportunities for Australians.


There are great ways to create a diversified investment portfolio that is climate positive, we outline some of the different asset classes available to invest in below.


How can I create a diversified investment portfolio with a positive climate impact?

A diversified investment portfolio should include diversity in:

  • Geography: therefore include both domestic and international assets;

  • Industry: climate positive investing doesn’t mean just investing in solar farms, there are climate friendly investments across every industry;

  • Asset classes: There are climate impact investments available in

  • Shares

  • Property

  • Bonds

  • Managed Funds

  • Cash accounts

  • Term deposits

  • Hybrid fixed interest securities

  • Infrastructure

Below are some tips to help you find positive climate investments in a wide range of asset classes:


Shares

It is possible to do your own research and purchase shares directly. This can be a difficult way go build a share portfolio, as research on a company’s climate credentials can be hard to find, and the brokerage cost of buying a basket of shares can be expensive.


Bloom Impact Investing offers investment in hundreds of shares, green bonds and renewable energy infrastructure projects, all via their app. All of the Bloom investments have been thoroughly screened to ensure that they have a positive climate impact.


Property

Ethical Property Australia specialises in connecting investors with socially responsible housing initiatives.


Bonds

It is possible to invest in Green Bonds. To be included as a green bond, a bond must be certified by the Climate Bonds Initiative (CBI). The CBI certifies ‘green bonds’ fixed-income investments that clearly earmark at least 95% of proceeds towards financing climate-friendly projects. Such projects can include those designed to prevent or reduce pollution, improve the sustainable use of natural resources, or help in transitioning to clean. There are some exchange traded funds listed on the ASX that include green bonds.


Infrastructure

Infrastructure investments are a form of “real assets,” which contain physical assets we see in everyday life like bridges, roads, highways, sewage systems, or energy. Other examples of infrastructure include transportation facilities, telecommunications networks, and water supplies. Infrastructure investment tends to be less volatile than some other asset classes and is sometimes sought as an investment. As a result, some companies and individuals like to invest in infrastructure funds for their defensive characteristics.


Things to be aware of when investing your SMSF

When managing or setting up your SMSF there are a few things you should be aware of, including:

  • Fees: whether investing through a brokerage platform, investing app or through a financial advisor it’s important to do your research on fees. Make sure you weigh up projected returns VS actuals, and any monthly, yearly or transaction fees associated with your SMSF. There are often hidden fees that come with investing, so make sure you review the Product Disclosure Statement (PDS) for any financial products you are considering investing in.

  • Regulatory requirements: there are several regulatory requirements that come with managing a SMSF. including responsibilities around contributions, sole purpose tests, reporting requirements and more. Check out this handy guide from the ATO that outlines everything you need to know about running a SMSF.

  • Tax declaration: if you run a SMSF you will be responsible for declaring how much income was deposited into your SMSF at the end of the financial year. There are a few regulations and steps you will need to fulfil in order to do this correctly, and not risk being potentially taxed at the highest bracket. Read page 14 of the ATO SMSF guide to learn about your responsibilities and obligations when it comes to tax time.

Where to go for information and advice

  1. Financial Advisors: financial Advisors are a great resource to tap into. They have strong knowledge of markets, investment opportunities and regulations. You can use RIAAs directory tool to find value aligned Financial Advisors.

  2. ATO: the Australian Tax Office (ATO) is a great resource to clarify your SMSF responsibilities and regulations when it comes to tax declaration. Visit their website to read through their resources, or use the live chat function to ask specific questions.

  3. MoneySmart: moneysmart is a free online tool managed by the Australian Government. It provides free and unbiased information, tools and tips related to financial services. Visit their website to find out more.

  4. RIAA: RIAA, short for Responsible Investment Association Australasia, is one of the peak bodies for responsible investing and sustainable finance in Australia and New Zealand. They have great tools, resources and information all related to ethical and responsible investing. Visit their website to learn more.


Why should I invest my SMSF with Bloom?

Bloom Impact Investing is an ethical investment fund focused on helping Australians align their investments with a positive climate impact.


Our diversified fund gives you access to a wide range of scientifically-proven climate solutions, as defined by Project Drawdown and ClimateWorks.


The Bloom Climate Impact fund diversifies its investments across many asset classes, including equities, bonds, alternatives and infrastructure investments.


You can feel confident you’re investing in impactful solutions like solar energy, electric vehicles, waste management and recycling to accelerate our transition to a Net-Zero Economy. For more information on Bloom and how you could invest your SMSF with us, visit bloom-impact.com/smsf.


Not sure if Bloom is for you?

Book an obligation free 1:1 session to learn more about Bloom and our Self Managed Super Fund.





The information in this post is prepared by Bloom Impact Investment Services Pty Ltd (ACN 651 965 098 AR 001294778), who is an authorised representative of Cache Investment Management Pty Ltd (ACN 624 306 430 AFSL 514 360) (Cache). Any financial products described in this post will be issued by Melbourne Securities Corporation Limited (ACN 160 326 545, AFSL 428 289), as disclosed in the relevant product disclosure statement. All information is general information only and does not take into account your personal circumstances, financial situation or needs. Before making a financial decision, you should read the relevant Product Disclosure Statement and Target Market Determination and consider whether the product is right for you and whether you should obtain advice from a professional financial adviser.
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