ENVIROMENT AWARE: Companies with the potential to cause environmental damage can risk staggeringly high costs with flow-on effects that impact shareholders.
ENVIROMENT AWARE: Companies with the potential to cause environmental damage can risk staggeringly high costs with flow-on effects that impact shareholders. MBPROJEKT_Maciej_Bledowski

Going green can be good for the pocket and the community

'BAN the bag' has been the battle cry of environmentalists for some time and research by Canstar Blue shows 71 per cent of shoppers support the ban on single-use plastic bags. But our money behaviour doesn't always reflect an eco-friendly mindset.

According to Finder, two out of five Australians don't even consider energy ratings when they buy an electrical appliance - price is still the main decider. Yet over time, an energy-efficient product can provide savings on power bills and do less harm to the planet.

Part of the reason we make choices this way lies in behavioural science. Our brains are hardwired to place greater value on what we have today (immediate cost savings) rather than what we may enjoy in the future (reduced power bills).

For investors, it can make good financial sense to consider environmental concerns when you're putting together a portfolio. For one thing, companies with the potential to cause environmental damage can risk staggeringly high costs with flow-on effects that impact shareholders.

In 2010 for instance, an oil rig operated by BP was destroyed in an explosion that sent an estimated 4.9 million barrels of oil into the Gulf of Mexico - the largest offshore spill in US history. Faced with a multi-billion dollar clean-up bill, BP's share value dropped 55 per cent.

Okay, this is an extreme example, but as a direct investor you have the freedom to cherry-pick listed companies that match your environmental views. For some investors, coal mining companies will be out. For others, companies engaged in high-waste manufacturing processes, will be a no-no.

But what if you choose to invest via a managed fund?

A number of funds specifically focus on responsible investing with an eco-aware focus. However, many Australian managed funds have introduced negative screens to exclude controversial industries from their portfolios. Even super funds are getting in on the act, with eight out of ten of the nation's largest super funds now committed to responsible investing.

It may mean more of your money is invested in a wind farm rather than a coal-fired power plant, and from a green perspective that's a good thing. Research also shows that taking an eco-friendly stance doesn't have to come at the cost of healthy long term returns.

If responsible investing is something you're interested in, check the principles underpinning a managed fund to make sure they are in line with your own views.

Bear in mind though that while green is good, so is black. Always check the fees and charges that apply to a managed fund. These can have a big impact on how much money you make over time or if you're putting your savings into an investment that could leave you in the red.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.


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