A guide to ethical investing on the ASX

Many people don't realise what companies their ASX ETFs might hold.

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When it comes to investing, choosing investments from an ethical standpoint has become an increasingly popular trend over the past decade. As more and more investors become aware of where their money is being invested, both in exchange traded funds (ETFs) or in their super funds, the more people want a say in what type of companies their their cash may be supporting.

Market-wide ETFs are a fantastic investment vehicle and popular ones at that, but the main advantage of an index-tracking ETF – buying the whole market – comes with the caveat that you are buying the WHOLE market, the good the bad and the ugly.

An ASX 200 ETF like iShares Core S&P/ASX 200 ETF (ASX: IOZ) invests dispassionately into the largest 200 ASX companies, regardless of their ethical track records. You may not want your money going into coal companies like Whitehaven Coal Ltd (ASX: WHC) or oil companies like Woodside Petroleum Ltd (ASX: WPL). You may not like the coal-seam gas fracking that Santos Ltd (ASX: STO) does or the poker machines that Aristocrat Leisure Limited (ASX: ALL) makes. But with an ASX 200 ETF, you are getting all of them.

The same problem is magnified with a global ETF. ETFs that track the MSCI World Index – like Vanguard MSCI Index International Shares ETF (ASX: VGS) are very popular. But an ETF like this invests in tobacco companies like Altria and British American Tobacco. Throw in liquor baron Diageo, weapons giant Lockheed Martin and nuclear fuel miner Blue Sky Uranium Corp, and you might have a few people getting cold feet. ETFs might not be as nice as you think.

So what's the solution?

There are many ETFs that track indices but exclude 'unethical' companies – meaning you still get whole-market exposure, but some of the nasties are taken out.

One example is the BetaShares Australian Sustainability Leaders ETF (ASX: FAIR). This ETF invests in 78 ASX companies that do not have involvement with fossil fuels, gambling, tobacco, weapons, animal cruelty, mandatory detention of asylum seekers, alcohol, junk food or human rights concerns, among other criteria.

If you're looking for a more global 'ethical' ETF – you could try BetaShares Global Sustainability Leaders ETF (ASX: ETHI). This ETF holds 100 international companies that follow similar criteria. You are still getting fantastic diversification with quality companies like Apple, Mastercard and Netflix, but you won't be mixing with some of the other less reputable companies out there.

Foolish takeaway

Of course, not everyone's ethics and values are the same – you might love the sport of shooting or think nuclear energy has a role to play in combating climate change. But if you're so inclined, maybe it's time to have a think about whether the investments you might hold – personally, or in your super – reflect where you would like to see your money go.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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