A guide to environmentally-friendly funds
January 2024
Concerns climate change will impact everyday lives has accelerated interest in so-called ESG funds which promise to match financial returns with environmental gain.
In fact, Australians can now choose from more than 250 funds which apply ESG – or environmental, social and governance – criteria to their investment strategies, according to research company Morningstar.
This is in addition to the ESG options many superannuation funds offer to members who want to align investments with personal values.
But ESG investing is not as simple choosing a fund with a sustainable label and assuming it will produce the desired outcome. Every ESG fund has a different strategy and some carry more risks than others.
Here are five tips to consider when choosing an ESG fund that fits with your personal objectives – both philosophical and financial.
- Assess your values and priorities: Determine which ESG factors are most important. Is environmental sustainability a chief concern or would you prefer investments to have a social impact? The latter might mean, for example, avoiding gambling shares. Alternatively, ethical corporate governance might be high on your agenda.
- Research investment options: Look for ESG funds that align with those values – and your financial goals too – by discussing available products with an adviser. The potential options include exchange traded funds, managed funds, managed accounts, and superannuation investments.
- Beware unexpected biases: ESG funds can have a bias towards sectors like technology that don’t pose the same overt environmental threat as miners. Such a bias might produce outsized gains when tech stocks are running – but can result in unwanted downside if they underperform. Consider whether a fund has appropriate diversification to meet your needs.
- Understand ESG intricacies: Sustainable investing may be an area in which active investing is a better choice than index investing. Need an extra sentence here.
- Monitor investments: Regularly monitor ESG investments to ensure the outcome meets original expectations. This process can form part of regular portfolio reviews with your adviser.
To find out more about ESG investing and available products, speak to your adviser
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