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How to choose an ethical investment: three things you need to know

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

By Josh Callaghan, General Manager of Wealth, Canstar

While ethical and impact investing are closely related, there is an important difference between the two.

Ethical investing looks to exclude companies and industries that negatively impact the environment or society.

Ethical investment products often exclude tobacco, defence and gambling.

On the other hand, impact investing looks to proactively find companies that are positively contributing to society.

Impact investors are looking at the environmental policies within organisations, their reporting standards on things like carbon footprint and their focus on corporate social responsibility. Both types of investing are a way for investors to align their wealth creation with their own personal values.

ethical investing impact investing tobacco

What does positive and negative screening mean?

By Josh Callaghan, General Manager of Wealth, Canstar

Screening stocks is the process of determining what companies are in your “investable universe”.

In terms of ethical and impact investing, the screens used determine which companies meet the investment objectives of the portfolio. Positive screening seeks to include companies that have certain attributes such as a particular level of gender diversity on a board or a certain carbon footprint.

Negative screening seeks to exclude companies on the basis of certain attributes, such as energy consumption or impact to natural resources. Of course, investors can use a combination of both types of screens to find companies that align with their ethics.

How do I choose an ethical investment?

By Emily Hollingum, CEO, Balance Impact

To choose an ethical investment you need to first define your ethical investment criteria and place some thresholds on the level of involvement.

For example, Woolworths is the largest pokie operator in Australia but it is predominantly known for its grocery stores. Will it be excluded in your gambling ban or will you just exclude Crown and Tabcorp?

In addition to your ethical investment goals, performance and fees should be part of your decision process, just like any other investment.

Whether you have decided to invest in a low-cost ETF, or a higher cost actively managed fund, check to see that any higher fees are justified by higher performance.

When considering performance, it is better to focus on longer-term performance (five years) than short-term performance, as it is more likely to show a trend rather than a one-off.

Grab the March issue of Money for more FAQs on ethical investing

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