How to Build an Ethical Stock Portfolio

Want to invest ‘green’ and with sustainability in mind? We talk you through how you can build an ethical stock portfolio.

Moving towards sustainability

Before sharing some strategies on how to build an ethical portfolio, it’s first important to set the green scene: the world is moving to being carbon neutral by 2050, and many global investors are also moving their portfolios into ethical, clean and green investments too.

It’s why Bloomberg Intelligence forecasts that investments with an environmental, social and governance (ESG) focus will grow to a record US$53 trillion by 2025, and make up a third of global assets.

Not only does ethical investing improve the world’s suitability, and work toward solving some of the world’s biggest challenges, but ethical investments have also historically produced better returns than their peers. So it’s a win; win for some.

To back this up, market consensus and research from the Responsible Investment Association Australasia (RIAA) have both showed that ethical investments outperformed their benchmarks over the short and long term. Meanwhile, those investors who ignore ESG factors, are more susceptible to greater financial risk.

Related article: Ethical investing in Australia – A guide to getting started.

In order for the world to remove greenhouse gas emission by 2050, an estimated US$50 to US$100 trillion will be needed to be spent on capital investment, to build a ‘’net zero” global economy. This means we will see a lot more innovation from the creation and adoption of electric trucks, and regulation from governments banning and phasing out petrol cars.

Just think about the drastic changes we saw in 2021:

• A major oil company said it will cut back on oil production
• Several major car makers announced they will only sell electric cars in a decade
• A global steelmaker said it will boost research and development to help fast track decarbonization.

That’s just the beginning – we will hopefully see more companies follow this trajectory in the next few years and they change their business models and innovate.

How to invest ethically

For investors, that means new investing opportunities. There are two simple ways to add sustainable investments to your portfolio:

1. 1. Buy ethical stocks that you align with your ethical values, or
   2. Through exchange traded funds (ETFs)

If you want to pick your own stocks, it’s important to know that both everyday investors, professional investors, and research houses can class socially responsible investments differently. For example, research house S&P Dow Jones Indices focuses on companies that are ‘’best in class’’ and excludes companies interacting with tobacco and controversial weapons, and companies that generate 5% or more of their revenue from thermal coal.

Whereas research house MSCI, screens Australian companies by excluding businesses that own any fossil fuel reserves or derive revenue from mining thermal coal or from oil and gas related activities. Plus MSCI also excludes companies with business activities in adult entertainment, alcohol, anti- animal welfare, civilian firearms, conventional weapons, controversial weapons, fossil fuel, gambling, genetically modified organisms (GMOs), nuclear weapons, tobacco and soft drinks.

Whatever your strategy or definition of a clean or ethical investment is, it’s really important to remember that markets move in cycles and up and go down, but over the long term markets go up. One of the best ways to put shock absorbers in your investment portfolio is to spread your investing across different sectors such as financials, property, resources, consumer spending, telecommunications, and healthcare.

Ethical and sustainable investment options

With this in mind, consider some of the below investments in different sectors:
1) Financials:

• MSCI deems seems Australian & New Zealand Banking Group (ASX:ANZ) as sustainable. S&P Dow Jones Indices deems Westpac (ASX:WBC), National Australian Bank (ASX:NAB) and Macquarie (ASX:MGQ) as responsible and sustainable.

2) Property:

• Real estate landlord Goodman Group (ASX:GMG) is deemed ethical by MSCI, and Scentre Group (ASX:SCG) is deemed sustainable by S&P Dow Jones Indices.

3) Consumer spending:

• Carsales.com (ASX:CAR) and Breville (ASX:BRG) are deemed as having high ESG qualities by S&P Dow Jones Indices

4) Telecommunications:

• Juggernaut Telstra (ASX: TLS) is rated as having a high ESG score by MSCI and S&P Dow Jones Indices. Real estate group REA (ASX:REA) is also classed as sustainable by S&P Dow Jones Indices.

5) Technology:

• MSCI deems accounting software provider Xero (ASX:XRO) as sustainable and share registry Computershare (ASX:CPU) is deemed ethical by S&P Dow Jones Indices.

6) Healthcare:

• Blood therapy business CSL (ASX:CSL) is rated as having a high ESG score by MSCI and S&P Dow Jones Indices. Cochlear (ASX:COH) is in S&P Dow Jones Indices list.

7) Industrials:

• MSCI and S&P Dow Jones Indices both deem toll road giant Transurban (ASX:TCL) as sustainable. There’s also pallet maker Brambles (ASX:BXB) deemed as best in class and sustainable by &P Dow Jones.

8) Resources:

• BHP (ASX:BHP) is deemed as ‘best in class’ by S&P Dow Jones Indices. Fortescue Metals (ASX:FMG) is deemed as ethical by MSCI.

If stock picking is not for you, consider investing in ETFs. Instead of researching the leading companies fighting climate change, or researching companies focused on sustainable development or waste management, you can invest in an ETF that does that for you. The ETF ERTH is a great example. ERTH invests across 100 companies that are leading the world and reducing their carbon footprints. It also invests in a little know company, Trane Technologies, who help leading global companies become sustainable.

Related article: Australian Share Market: Glossary of Common Terms

But that’s not the only ESG focused ETF on the ASX. There’s now 15 ESG ETFs. By far the most popular ETF in 2020 was the ETHI. From all the ETFs listed on the ASX, ETHI was actually in the top 10 of entire ETF inflows, proving that investors are going green in a big way. As above, it’s really important to note that every ESG ETF also has its own approach to building an ESG ETF.

Before investing you should consider your own personal circumstances, investment goals and strategy.

Cover image source: wk1003mike/Shutterstock.com

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