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Would you give up your bus seat for someone in need? Post the selfie where you look like a snack and your mate looks paru as? Steal a DVD? 💿 Every day we’re faced with ethical and moral dilemmas, and deciding where to invest your hard-earned money (or your lucky windfall) can be one of them.
ESG investing is an approach to investing based on Environmental, Social, and Governance factors alongside traditional financial metrics. Values-based and ESG investing has been top of mind for some investors recently, particularly after several campaigns urging investors to switch their KiwiSaver funds away from supporting conflicts to something more ethical.
The challenge in defining ethical investing is that it's entirely subjective, difficult to measure, and at times has been revealed as greenwashing. Volkswagen was caught cheating emissions tests in ‘Dieselgate', and Kmart NZ got a warning recently over their sustainable cotton. Let’s look at different approaches to buying eggs 🍳
- Factory-farmed eggs (lowest cost, maximum efficiency) — like investing in traditional index funds that historically prioritized returns. This aligns with the 'exclusion' criteria where financial returns tend to outweigh concerns like animal welfare, or environmental impact.
- Free-range eggs (supporting improved practices) — similar to ESG investing using a 'best-in-class' criteria to invest in companies that focus on practices that are ESG positive. These can range from supporting a free-range farmer already up and running to supporting a factory farmer transitioning to free-range.
- Avoiding eggs altogether (zero tolerance approach) — comparable to excluding entire sectors like tobacco, weapons, or fossil fuels from your portfolio.
- Plant-based alternatives (innovation-focused solutions) — like investing in companies developing innovative and sustainable technologies and business models, meeting a criteria based on impact.
- Buying whatever's available (limited options) — reflecting constraints some investors face with default KiwiSaver funds, or limited options on investment platforms.
Every investor brings a different perspective to the breakfast buffet. Not everyone is concerned with ESG values when investing, in fact according to the US SIF Foundation, around 12% of the total US assets under management are invested in assets following ESG principles.
Defining ethical companies and exchange-traded funds
While there's no official naughty or nice list for ‘ethical’ US stocks, several organizations rate companies on ESG factors. You can check basic ratings for free, but the detailed tools can be costly and are aimed at institutional investors. The lack of one standardised measurement for ESG can be confusing, however, having one measurement of such a subjective thing is not the perfect solution.
MSCI ESG Ratings - Widely used, rating companies from CCC to AAA based on ESG factors. The MSCI ESG Index is the underlying index for several ESG-focused exchange-traded funds, including iShares ESG Optimized MSCI USA ETF (SUSA), Xtrackers MSCI USA Selection Equity ETF (USSG), and S&P 500 Scored & Screened ETF (SNPE)
Dow Jones Sustainability Index (DJSI) - The DJSI is a performance benchmark for ESG-conscious investors. It includes the top 10% of companies (around 300) in the Dow Jones Global Total Stock Market Index in terms of economic, environmental, and social criteria. No exchange-traded funds track this index on the whole, some use it as an underlying reference.
Is ESG investing worth your time, and your money?
Adding ESG criteria to your investment research can take time, and add a level of complexity. The way it is measured isn’t standardised, and the impact it has is difficult to measure. If you’re interested in ESG investing, your KiwiSaver fund can be a place to start. Tools like Mindful Money provide a clear visual breakdown of the companies in each fund and flag potential ethical concerns.
You can start by defining your investment goals and creating watchlists of companies while you dig deeper and look for companies who can substantiate their ESG claims with real evidence; green investing isn’t always black and white. Or you can leave your moral dilemmas in the egg aisle at the supermarket - how you invest your money is entirely up to you.
We’re not financial advisors and Hatch news is for your information only. However dazzling our writing, none of it is a recommendation to invest in any of the companies or funds mentioned. If you want support before making any investment decisions, consider seeking financial advice from a licensed provider. We’ve done our best to ensure all information is current when we pushed ‘publish’ on this article. And of course, with investing, your money isn’t guaranteed to grow and there’s always a risk you might lose money.
