So now that ethical investors have taken advantage of the highs, how do they protect their portfolios during the lows?
One of Thomas’s go-to recommendations for ethical investors seeking defensive capital appreciation concerns water rights.
Two ASX-listed companies offer this exposure: Duxton Water (ASX/D20) and Wilson Alternative Access Fund (WMA/ASX).
“Both have done well during this time,” says Thomas. “They are open to retail investors and meet our ESG standards.”
2. Unlisted investments indexed to inflation
Ethical investors can gain exposure to a range of unlisted “clean” infrastructure and real estate assets that mostly have inflation built into their contracts. This means that during times of high inflation, tenants pay higher rent, protecting both the asset’s income stream and its long-term value.
Australian Unity offers a range of ethical property investment options, including specialist disability accommodation funds, childcare and a diverse range of healthcare property trusts.
3. Green and sustainable social links
These assets are now facing headwinds, so be sure to do your research, but there are a range of bonds that allow investors to fund ESG-friendly projects, such as building solar farms, green buildings and electric vehicles.
S&P Global Ratings expects “sustainability-linked” bonds to be the fastest growing subset of ESG bonds, with $92 billion issued last year. Unlike traditional green bonds, they are not earmarked for specific environmental projects, S&P said.
Although bonds generally do not hold up well in times of high inflation, these defensive assets are worth considering when building a diversified ethical portfolio.
4. Carbon offsets
Businesses and governments around the world are racing to commit to net zero emissions. To get there, many will have to buy carbon offsets.
The forces of supply and demand mean that the costs of these offsets will likely rise over time, especially as growing pressure to take greater action drives emissions targets forward.
The recent bad press over the integrity of the Australian system could be either a warning to investors or a welcome exercise in cleaning up the sector and de-risking assets.
The sector is not very liquid, but specialist fund managers do the heavy lifting for you. Apostle Fund Management is an ethical investment company active in this field.
“It doesn’t take a genius to say the price of carbon is going to go up,” says Karyn West, chief executive of Apostle. “You have to think of it like gold. It helps you offset some of your lack of commodity exposure.
5. Diversify ETFs
You may have dipped your toe in the ETF pond during the pandemic. But instead of crystallizing your losses by selling now, you could view the latest market downturn as a buying opportunity.
There is a diverse range of ETFs on offer – global equities, but also those with exposure to unlisted assets, bonds and green energy venture capital.
Critics of passive investing say it’s high risk in times of volatility because the scatter gun approach considers the good, the bad, and the ugly. But fans say there’s no better way to branch out.
Thomas acknowledges that ethical investors who fail to profit from the surge in fossil fuel stocks are currently being penalized, but overall he says this sector is destined for growth.
“There are significant tailwinds behind these investments,” says Thomas. “We tell our customers to be patient. Now is not the time to panic. »
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. Before making financial decisions, they should always seek their own professional advice that takes into account their personal circumstances.