Learn more about ethical investments and what options are available to you
Increased public awareness of issues such as climate change and human rights has led to a demand for ethical investment funds, and as a result there are a growing number to choose from.
Ethical investment funds tend to take one of two approaches:
- Funds that avoid stocks that have a negative impact on the environment and its people – they tend to screen out companies involved in contentious sectors such as tobacco, oil and alcohol, and opt instead for established mainstream companies with a proven ethical and environmental track record.
- Funds that target companies that are actively making a positive contribution to the environment and its people – such as designing green transport or developing processes that minimise pollution.
What types of ethical investments are available?
You can choose to invest directly into companies that meet certain “green” criteria, either through a self-managed portfolio or via a stock broker, or you can look at “collective” type funds, such as unit trusts, investment funds, open ended investment companies (OEICs) and pension funds. There are also thematic funds that focus on specific environmental issues as well as funds that are designed to meet cultural requirements, for instance Sharia-compliant funds.
There are ethical funds that invest in equities or fixed interest securities (bonds) and these can be either growth or income orientated. Although ethical funds represent a small percentage of total funds under management, there is a wide choice, so whatever your investment goals, you can still be a socially responsible investor.
Investment transparency, what it means for you
The need for transparency from investment providers came to the forefront during the financial crisis, and this, coupled with the fact that environmental issues are now a key consideration in government policy, has led to a growing trend for investment managers to incorporate environmental, social and governance (ESG) issues into mainstream investment. This means you may be able to find a mainstream investment that satisfies your moral needs, without necessarily opting for a specialist ethical investment fund.
Ethical investment plans: performance and risk
Ethical investment funds tend to exclude sectors such as defence and pharmaceuticals – which typically weather poor market conditions fairly well – and as a result they can be vulnerable in a downturn. However, there is evidence that the gap between ethical and non-ethical investment fund shortfalls has narrowed in recent years, which means that if you opt for an ethical investment you don’t necessarily have to compromise on performance.
However, you should be aware that if you choose an ethical investment fund that targets companies that are making a positive contribution to the environment, the companies that fit this profile are usually involved in new and innovative technologies, or new markets, and they tend to have a higher risk profile than organisations involved in more mainstream activities. It creates the opportunity for higher returns, but equally has the potential for greater losses. So, if your risk-profile is “adventurous” this would be a good investment option for you.
Take into account your overall objectives risk profile
Before you make a decision about whether or not to choose an ethical investment, you need to determine your investment goals:
- Are you looking to produce an income, or investing for capital growth, or a combination of the two?
- Are you looking to invest for the short or long-term?
- Are you looking to invest as an individual or as part of a collective fund?
- What is your attitude to risk?
Based on this assessment you can begin to tailor your investment portfolio to achieve your goals, and with the wide selection of ethical investment opportunities on offer you can choose the best way to do this without compromising your principles.