Hi Ruth,
I’m getting into investing and really like the idea of sustainable options — supporting companies that are good for the planet and people. But I’m also focused on growing my money, and I’ve heard mixed things about whether ethical investing means lower returns. Can I actually both stay true to my values and still build wealth? Or is that just wishful thinking?
I like this question. It does not come up too often, but I had a good, long chat with someone about it just yesterday. They, too, were on the same information-gathering mission as you. Instead of asking, “How can I make the most money?” they also asked, “How can I make money and do good?” It shows a shift in mindset. So let’s think this through. Can you stay true to your values and still build wealth through ethical investing? Or are you going to have to choose one over the other?
Also called sustainable, responsible, or ESG (Environmental, Social, and Governance) investing, it’s essentially the idea of putting your money into companies or funds that align with your personal values. You might want to avoid industries like fossil fuels, gambling, tobacco, or weapons, and instead support companies doing good work in areas like clean energy, healthcare, social equity, or environmental restoration.
Your preference is to avoid investing your money in something you fundamentally disagree with, which is commendable, but complicated. There are many grey areas when it comes to investing ethically.
Suppose you find an ethical investment that ticks all of your boxes. The big worry is that investing ethically means you might have to accept lower returns, which may or may not be true. Like any other niche investment, they may match, outperform, or underperform other investment classes or the average of the entire share market.
You would hope that companies that manage their environmental risks, treat their workers well, and have solid governance tend to be better-run businesses that make money because they’re planning for the future, not just tomorrow’s share price.
That said, not all sustainable funds or companies perform the same, and putting an “ethical” label on something doesn’t automatically make it a profitable investment. Some funds have higher fees or aren’t as diversified as they should or could be. Others might be “greenwashed”; they say they’re sustainable but don’t walk the talk. So, as with all investing, it pays to do your homework. Tools like Mindful Money (a great NZ-based site) let you compare KiwiSaver and managed funds on their ethical footprint, which is super handy.
It’s also worth remembering that ethical investing has entered the public arena, and our conversations, not just because people care about doing good, but because fund managers saw an opportunity to appeal to a growing niche. Just like a fund manager might offer a sector fund for technology, property, or crypto, they’ve created ESG and ethical funds for those who want their money to reflect their values.
Because of this, it’s essential to go in with eyes wide open. Fund providers are running a business. They aim to give you what you want and charge you a fee. Think of it like a supermarket: shelves lined with thousands of products tailored to different customers. The fund manager doesn’t want anyone to walk away without “buying something,” so they’ll develop funds that speak to your values, which in your case is ethical investing.
The key is to ask yourself: “Is this fund doing what it says it’s doing, and am I paying a fair price for that?” Some ethical funds are well-designed, diversified, and low-cost. Others are more about marketing than substance, and the fees can quietly eat away at your returns over time, or the fund will perform so poorly that it is closed.
It is impossible for me not to talk about the alternative approach, outlined so well by J.L. Collins in The Simple Path to Wealth, which is to invest in the entire share market through a broad-based index fund. That means you’re buying the good, the bad, and the ugly, all of it. On the face of it, that might seem to conflict with ethical investing. But here’s the thing — what’s ethical to me might not be ethical to you. One person’s red flag company might be another’s innovator. The complexity of global businesses is so vast that it’s nearly impossible to unpack every layer of what they’re doing and what they’re investing in.
That’s why J.L. Collins and many long-term investors argue that owning the entire market is not only a strong strategy for building wealth, but also acknowledges that we don’t have the time, access, or expertise to hand-pick winners or weed out every “bad” company.
It also avoids giving us an inflated confidence in our ability to judge the ethics or performance of complex companies and ESG funds.
When I talk with people who are just starting, I always come back to this: You don’t need to be perfect, you just need to be intentional. And that’s what you’re already doing by asking this question.
You might start by asking yourself what values matter most to you. For some people, it’s the climate. For others, it’s social equity or animal welfare. That’ll help you narrow down your choices. Then you can look for funds that align with those values, have strong performance, and have low fees.
In New Zealand, we’re lucky to have more options than we used to, and that, in many ways, backs up my point; this is a growing market for investment providers.
In a word, yes, you can. The key is sticking to sound investing principles, no matter what kind of fund you choose. Choose a diversified investment, keep your costs low, invest regularly, and stay in the market long-term.
Ethical investing encourages this kind of behaviour. Once they have chosen an investment, people tend to stick with it because their ethics are unlikely to change, and they’re not just chasing returns but investing in a future they believe in. That long-term mindset is a huge advantage in building wealth.
But equally, the broad-market approach of buying the entire index in the form of just one global fund is just as valid, and arguably even more straightforward. You’re not trying to out-think the market or untangle the ethics of every business. You’re accepting the market as it is, riding the wave of long-term global growth, and using your time and energy for other things that matter to you.
Something to consider is that your spending dollar may have more impact on a company than your investing dollar. Companies go out of business because no one wants what they are selling anymore. If enough people decide not to buy the product or service of what they consider to be an unethical company, it will go out of business.
So no, it’s not wishful thinking. You can grow your wealth and stay true to your values. You can invest in ESG funds that align with your principles. But I’d also encourage you to keep a foot in both camps and keep learning about investing.
You can also acknowledge your limitations and invest broadly, as J.L. Collins recommends, knowing you own the whole market. I suggest you choose an investment in each, and start a small and regular investment in it. Budget for these investments using PocketSmith, and monitor their performance using Sharesight. Review it in 12 months, making changes if needed, or increasing your contributions if you want to.
Just remember: Ethical funds are products designed to meet customer needs. You are the ethically motivated customer, and like any product, you must monitor whether it’s meeting your needs.
Happy saving!
Got a burning money question for Ruth? Send them through to [email protected]!
Ruth blogs at thehappysaver.com all about how she and her family handle money. What’s the secret? Spend less than you earn, invest the difference, avoid debt and budget each dollar that flows through your hands. She firmly believes that if you can just get the basics right, life becomes easier from there on in.
