How I’m using Ethical Investing for Financial Independence in Australia

A reader today asked: “I was intrigued by your mention of ethical investing but have failed to find any posts that outline the specifics of your investment choices… Would you be willing to point me in the right direction?”

Good call! It’s about time I wrote about how I’m investing on my path to financial independence. Keeping in mind there is no single perfect “right direction”, below outlines the ethical investments I’ve chosen to use here in Australia.

Disclaimer: All information on this site is for general information purposes only. Nothing on this site should ever be considered as financial or investment advice. Before making any financial decision, you must do your own research and/or seek advice from a qualified financial adviser for your specific situation. By reading this site, you agree that you are solely responsible for making your own financial and investment decisions.

What is ethical investing?

According to this good summary on Canstar: “Ethical investment (or responsible investment)… is when an investment is selected to complement views on moral, environmental or political matters.” (Choice has another good backgrounder here.)

Typically, ethical investing involves:

• negative screening – ruling out investment in companies that don’t pass selected criteria (eg. fossil fuel companies, tobacco, adult industry)
  and/or
• positive screening – prioritising investment in companies who have a positive environment or social (eg. renewable energy)

I’d like to note that there is no single perfect way to do ethical investing (aka. socially responsible investing or impact investing). Everyone’s values vary; for example, some people may feel strongly about avoiding fossil fuel-based companies in their portfolio, but be unconcerned by having investments in gambling industry. Others may want to ensure they aren’t shareholders in companies connected to child labour; or want to avoid old-growth forestry logging or uranium mining.

There are a variety of funds out there with different focusses. The key is to identify your top “non-negotiables” in your investing and use that to find your best fit – even if imperfect.

You should also consider their management fees, which are typically higher than plain index funds, possibly due to fund managers being more active in screening out non-ethical companies. Also look at the fund returns too, as higher performance could offset management fee differences.

(PS. Don’t let over-researching and “analysis paralysis” prevent you from taking investment action. Make a start and tweak from there as you learn more.)

Here’s a quick breakdown of how I choose to invest ethically and spend consciously towards financial independence in Australia.

Shares & ETFs Investments

My personal preference is to buy on the stock market as I like the lower management fees this way, while being comfortable with the purchase process and tracking requirements. Others may prefer a managed fund option they can Bpay into regularly and have easier paperwork. I’ll update this post later with some ethical managed fund suggestions, such as Australian Ethical Investments.

Background: Since buying my first shares ten years ago, my investment strategy has evolved as I’ve learned more. From individual stock picks (don’t recommend), I moved on to Listed Investment Companies, then broad Index Fund ETFs that followed portions of the Australian or international stockmarkets. (Specifically, Vanguard Australia’s Exchange Traded Funds: VAS that follows the Australian ASX 300, plus VGS following top 1500 International companies, many of which are USA-based.)

Now? Any new investments I make are split between the following ethical ETFs bought on the Australian stockmarket:

• FAIR – Betashares Australian Sustainability Leaders ETF – review here
• ETHI – Betashares Global Sustainability Leaders ETF – review here

Other options that looked good to me included:

• GRNV – VanEck Vectors MSCI Australian Sustainable Equity ETF – review available here; similar to the Betashares FAIR above.
• VESG – Vanguard Ethically Conscious International Shares Index ETF (see a comparison between the standard VGS and VESG here); doesn’t screen out much though.
• Others listed at ETF Bloke’s post here.

Note: If you’re wanting a way to dip your toe in with smaller amounts, consider signing up to Raiz micro-investing app ($5 to start via link). The Emerald portfolio is a socially responsible investment option there. The regular newsletters are a decent way to learn more about investing in small bursts. It’s worth saying that Raiz has a $2.50 fee per month, so it’s best to get your balance to over $500+ in there so your investment returns cover those fees.

Superannuation

For my superannuation (ie. Australian retirement account), I’m in a single fund:

• Australian Ethical Superannuation – Growth Fund

I prefer the Growth over Balanced or Conservative, as Growth has a higher proportion of shares and my 30 year timeframe before I access my superannuation allows more opportunity for greater returns with ample time to ride out any volatility.

As expected, there are higher fees than a more basic industry super fund. That being said, I’ve found that the returns are comparable after fees.
Eg. Looking at net returns for 3 years as at 31 Mar 2020:
Australian Ethical Super Growth = 5.10%.
Hostplus Shares Plus = 4.87%

Other good alternatives I’ve seen include:

• Future Super – focus on no fossil fuels
• Verve Super

While we’re on the subject, here are some other ways in which I maximise superannuation:

• I only have one fund, so only pay one set of management fees.
• I make extra after-tax contribution via Bpay of $1000 per year (paid by $85/month). This allows me to get the maximum potential government co-contribution for low income earners, up to $500 depending on other earnings. As I tend towards a lower income, this is an easy way to get bonus return.
• I don’t add much else, as I prefer to grow my investments outside of superannuation (which I can’t touch ’till 60 years of age).
• For those with higher income, it can be worth salary sacrificing in pre-tax dollars into your superannuation to save significantly on tax. I have done this in the past, including when at the cusp of different income tax brackets. Doing so meant I ended up ahead with simulaneously more in my pocket and my superannuation.

Banking

I aim to ensure my banking relationships are also with ethically-minded organisations. A few years ago, I divested from one of the “big four” banks which had fossil fuel investments. I switched over my transaction and high interest savings account to:

• Bank Australia – a customer-owned bank with no fossil fuel investment commitment, plus other positives such as ensuring operations are carbon neutral and on 100% renewable energy.
• “At Bank Australia, we say our money is ‘clean’ because it is never loaned to industries (eg coal, nuclear weapons, gambling, tobacco, live animal export) that do harm. Instead, as a customer-owned bank, we believe it’s important to use our customers’ money in responsible ways, creating positive impact for people, their communities and the planet.”

Conscious Spending

Beyond aiming to be ethical with investing and banking, I aim to ensure that my consumer spending is done in a conscious way. Again, I’m certainly not perfect, but some things I prioritise are:

• Concentrating on low consumption and not buying much overall; this especially comes easily on my extended travels when I’ve living out of a suitcase.
• Purchasing carbon offsets for flights and taking long-distance buses/trains as a preference. (I’m also looking into carbon offsetting for my general lifestyle. Post to come after more research.)
• When I do purchase, generally buying secondhand. In recent years, this has included my laptop, iPhone, camera, shoes, and clothes. I am a fan of setting up search alerts on eBay for my preferred brands and sizes of clothing when I need specific things.
• Reducing meat and dairy consumption.
• Reducing packaging and bringing own utensils or cups for takeaway.
• Committing 5-10% of my income to regular charity donations to organisations endorsed by Effective Altruism as having the highest impact.
• Purchasing from small businesses and local suppliers to support my community.

Want to learn more?

Here is some more reading on the topic.

• Rich & Resilient Living (USA) – How I am Investing to Save the Planet
• Financial Mechanic (USA) – Be a Green Investor with Socially Responsible Investing

Let me know in the comments if there’s anything else you’re curious about!

Cover photo by Harry Cunningham @harry.digital from Pexels