Ethical investment boom comes with a few warnings

Ethical investments in feel-good sectors like renewable energy or health are rising, but there are dangers investors must know.

Ethical investing continues to boom in popularity but chasing good karma with your cash comes with some potential traps.

Not all ethical investments – also known as sustainable investments – are created equal, so it’s wise to get to know the sector a little more before taking a kind-hearted plunge.

These investments usually focus on feel-good sectors such as renewable energy or health and screen out areas such as tobaccco and weapons. Ethical and responsible investments now represent almost 40 per cent of all managed assets in Australia and have delivered better returns than traditional funds in the past decade.

Renewable energy is a key focus of ethical investors.

Online investment service Six Park’s co-CEO, Pat Garrett, says there are a few dangers and assumptions that can turn your good intentions into bad investment outcomes.

“Watch out for green washing,” he says.

“There are a lot of investments being marketed around sustainability, but many are unclear or opaque about how the investments are being selected and what sustainability criteria or frameworks have been applied.

“You could end up buying something that’s not as green as it seems to be on the surface.”

Garrett says the cost of investing should be understood, with “noticeable differences” in management fees among sustainable exchange-traded funds in Australia.

And ethical investors need to make sure that their investments remain diversified to help reduce risk and smooth out returns.

“Some sustainable investment options can be very heavily weighted toward particular industries, such as medical or tech stocks, which can mean that returns and risks – both positive and negative – are more pronounced,” Garrett says.

Six Park co-CEO Pat Garrett

Novo Wealth director and adviser Paul Garner

“Don’t put all your eggs in one basket, as the saying goes – you should still invest across different kinds of assets and different geographies.”

Novo Wealth director Paul Garner says interest ethical or sustainable investing has surged in the past year but the sector may cause confusion.

“It can be called ethical, responsible or sustainable investing but that can mean different things,” he says.

“Sometimes it may be called a sustainable fund, but that may mean sustainable earnings rather than sustainable industries.

“Do your research and dig down. A fund may publish its top 10 holdings but you don’t know what’s underneath that.”

If you don’t want to do it yourself, some advisers, such as Garner, are part of Australia’s Ethical Advisers Co-op, which specialises in this stuff.

“We can talk to fund managers and get their complete list of investments,” Garner says.

@keanemoney