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Ethical investments

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Ethical investments

Increased public awareness of issues such as, climate change and human rights has led to an increasing demand for ethical investment funds, and as a result there are a growing number to choose from.

What is ethical investing?

Ethical investing means choosing stocks, shares or other investments that fit certain criteria. Originally ethical funds were all about avoiding the five Bs – boobs, booze, baccy, betting and bombs (pornography, alcohol, tobacco, gambling, defence). Increasingly ethical fund managers avoid firms with poor labour records (sweatshops and modern slavery) as well as environmentally damaging sectors such as mining and oil and gas.

Ethical investing also now looks not just at avoiding bad behaviour but at promoting positive behaviour that is environmentally and socially responsible and sustainable.

Over the past few years companies and executive boards have come under the spotlight for the way they treat the environment, their employees, the resources they use and the principles they apply. High profile campaigns by the likes of Greta Thunberg and Extinction Rebellion have brought attention to the role that big business needs to play in building a sustainable future.

Why is ethical investing important now?

In the past, ethical investment funds in the UK and worldwide tended to concentrate on weeding out and avoiding so-called “sin stocks”. This might include mining, tobacco and firearms, but could include a variety of banned sectors and companies depending on the investment criteria of the fund manager.

While this was popular with some investors, it did mean that many large companies, particularly those in the FTSE 100 index and other world and European indices, were left out because of the screening process. This sometimes led to ethical funds underperforming compared to more general funds, and led to an imbalance in the companies and sectors held, increasing potential risk for the investor.

In recent years, thanks to a greater awareness of environmental matters and a recognition by companies that Social & Corporate Responsibility (SCR) was becoming a more important aspect of the way they did business, the focus has changed.

What are the types of ethical investment?

Nowadays ethical investment concentrates more on selecting companies that can demonstrate that they have a commitment to sustainability and environmental responsibility.

This has led many more mainstream companies to incorporate SCR principles into their business vision and changed the way they operate. Companies now make a great effort to ensure that their business plans incorporate Environmental, Social & Governance (ESG).

Company executives know that shareholders and potential investors will be looking to see how good their ESG principles are before they invest in them. In this way, ethical investing in the UK has become much more mainstream, and is no longer a specialist or niche type of investing.

Can I invest in an ethical ISA?

An Individual Savings Accounts (ISA) is a tax-free wrapper into which you can put a variety of investments. There are lots of ethical investment funds to choose from and you can buy them within your ISA.

For example, you could choose an ethical stocks & shares ISA, or you could select companies that do business on ESG principles to include in your investments, and buy these as separate and individual shares. You can also choose the best green stocks & shares ISAs. These will apply strict environmentally friendly rules to the companies, which they include in their investment list.

As so many companies are now doing business with an environmental outlook, there are lots of ethical investment managed funds to choose from. Many of the top ethical funds in the UK perform well in their own right.

How do I choose what type of ethical fund to invest in?

Ethical investment funds tend to take one of two approaches:

Avoiding negative impact - 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.

Positive contributions - Funds that target companies that are actively making a positive contribution to the environment and its people. Companies such as those 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.

Ethical investments, scales

How do I know if a fund is ethical?

The need for transparency from investment providers came to the forefront during the financial crisis. 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.

The other reason for the popularity of ethical funds is that younger investors rate the responsibility of a company in terms of social and environmental behaviour, just as highly as share price performance.

This has meant that companies that want to attract a younger workforce have had to change their business practices, helping them to survive in today’s competitive world. This in turn has led them to incorporate more ethical elements to the way they operate.

Issues around climate change, carbon footprint, global warming and the treatment of employees mean that companies are operating in a very different world to the one they were in ten years ago.

Ethical investment plans: performance and risk

The gap between ethical and non-ethical investment fund performance 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 they are involved in new markets, and they have potential for growth but may also be higher risk.

What do I need to think about when I am choosing an ethical fund?

Before you make a decision about whether 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. With the wide selection of ethical investment opportunities on offer, you can choose the best way to do this without compromising your principles.

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