Getting to Know the ‘E’ in ESG Investing

As climate change intensifies, many investors are wondering how to adapt our everyday actions and decisions to build a more sustainable future. Kate Campbell from Rask Finance gives us an overview of ethical and ESG investing, and explores the impact that investors can have on the environment, by investing more mindfully.

Over the last few years many of us have started thinking about our impact, not only as consumers, but as investors as well. If you’re in that bucket, you may have heard about ethical and ESG investing, but if not, let me unpack them for you.

What is ethical and ESG investing?

Ethical investing is about investing your money according to your personal beliefs, principles and morals. It’s about really thinking about your values, and letting them guide your investment decisions.

Don’t want to support fossil fuel production? You can choose to avoid investing in companies that contribute excess carbon emissions.

Have a strong opinion about gambling? You can specifically exclude companies that support this industry from your portfolio.

If you have issues with tobacco, alcohol, animal research, you name it, these can all be excluded from your investment process!

Just like avoiding McDonalds if you’re on a low-carb diet, ESG-focused investing is all about figuring out what’s important to you then, if you choose to, avoiding the things that don’t fit with your investing style.

ESG stands for Environmental, Social & Governance. These are probably the most important three letters that you, as an investor and consumer, will need to remember and understand over the next 20 to 50 years.

You can use this framework as an investor to analyze and rank a company according to its policy and impact on the environment, the workplace and community (social), and its management team, culture and leadership principles (governance).

So as promised, let’s dive into the ‘E’ in ESG Investing, and the impact that your individual investment decisions can have on the environment.

Exploring your carbon footprint as an investor

There are many ways to manage your environmental impact on the world. One of them is knowing how your consumption and output, using various ‘things’ around you, translates into carbon.

To simplify the science, think of carbon as your footprint on the world. You consume something (hot water, petrol, plastic) and the net result is an emission of carbon. The common ‘unit’ to measure carbon impact (positive/savings or negative/emissions) is something called “tons of carbon dioxide equivalent” or “tCO2e” for short.

When we emit carbon, we can measure our carbon footprint as individuals, as a country (Australia) or even as a company/organization. Then, through some careful analysis, auditing and a few assumptions, we can measure the impact of investing in a portfolio of companies that take climate change seriously.

This is challenging to work out on your own, but fortunately, some of the largest sustainability-focused investment companies (in Australia that is), such as Future Super and Australian Ethical, have helpful tools and reports to put those numbers in context.

A diagram showing ways you can reduce your carbon impact as an individual and investor

Together with findings from some academic studies, our team at Rask Education have produced the chart above, which can help you put into context your impact by choosing to invest in a sustainable or ethical manner.

The compounding effect of ethical investing

Even at the lower end of the investment spectrum, where you simply invest in companies with net-zero carbon emissions, switching to (or doing it yourself!) a fund manager or super fund that avoids bad companies is equivalent to around two vegans, or avoiding a return trip to Paris plus a house full of modern light bulbs or only hang-drying clothes.

Remember, the numbers in the chart above are simply one year’s worth of impact, and these things will compound over time! So, the first year of saving on carbon contributes to a better planet in years 2, 3, 4… and so on.

Bottom line: chances are, you’ll be investing more money in your retirement fund, ETFs, Super, managed funds and shares over the coming decades.

And, as more people start to pay attention to where their money is invested and the impact it’s having on the world, the more they’ll start influencing investment companies, banks and retirement funds to give us (and the next generation) more sustainable investment options.

Find out more about how investing sustainably can lead to more positive outcomes for the environment, alongside society and business, with Rask Education’s free ethical investing course.

**Important Disclaimer: **

This article contains general financial information only. That means the information does not take into account your objectives, financial situation, or needs. Because of that, you should consider if the information is appropriate to you and your needs, before acting on it. If you’re confused about what that means or what your needs are, you should always consult a licensed and trusted financial planner. Unfortunately, we cannot guarantee the accuracy of the information in this podcast, including any financial, taxation, and/or legal information. Remember, past performance is not a reliable indicator of future performance. The Rask Group is NOT a qualified tax accountant, financial (tax) adviser, or financial adviser.

Kate heads up community and education at Rask Australia. Kate is the creator behind Rask’s FIRE course and is the co-host of the The Australian Finance Podcast. Kate is also the Founder of How To Money, including the How To Money podcast. Previously, Kate worked at Citigroup and InvestSMART. She holds a Bachelor of Business Management.

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