Ethical investing is a broad term that covers various approaches to investing that consider ethical values and financial returns.
These ethical values might relate to:
Basically, ethical investing means not investing in companies that go against your beliefs. It can also mean investing in companies that make a real, positive impact or investing in companies to help them reduce their negative impact.
There are a few different types of ethical investments, which we will detail below.
This is when you choose not to invest in companies that don’t align with your beliefs. For example, you might be passionate about animals, so you might refrain from investing in a company that practices animal testing. Or, you might be against the use of fossil fuels, so naturally, you would avoid investing in an oil company.
The pros are that you know your money won’t be going toward things you are against. The cons are that the remaining companies left for you to invest in might not necessarily be great; they might just be neutral.
This is when you choose to invest in companies that are aiming to make a difference. For example, if you’re passionate about banning fossil fuels, you might invest in a company that produces solar panels. If you are passionate about gender rights, you might look for companies that support equal pay and are transparent about their gender pay gap (or lack thereof).
A pro of impact investing is that your money can make some difference. The cons are that you’ll have fewer companies to choose from, and the real-world impact you want might not be achieved.
This is when your investment goes toward making the company you are investing in, more positive. You might invest in a company that is fundraising to move to renewable energy.
The pros are that this type of investing opens up a wider range of companies for you to invest in. The cons are that your money could end up being invested in practices you don’t agree with.
Faith funds are like any other investing in that the end goal is to raise more returns for investors. However, the main difference is that the funds will often involve managers and investments that align with a specific religious belief. This can cross into exclusionary investing, as often areas like alcohol, tobacco and weaponry are deemed immoral, so these won’t be invested in.
The pros are that investors know they are putting their money toward things they agree with. The cons are that the areas of investment are smaller, so there are fewer funds to choose from.
From May 31st (2024), the FCA (Financial Conduct Authority) will put in an ‘anti greenwashing ban’. This bans funds from using language like sustainable, green or responsible, without being able to back up the claims.
(Greenwashing: the act of making false or misleading statements about the environmental benefits of a product or practice).
ESG (environmental, social and governance) used to be a blanket term for all kinds of ethical investments. However, ethical investors should know when to view an ESG label with caution.
Sometimes, ESG might just mean thinking about environmental impact without actually doing anything about it.
For example, you could find an ESG mutual fund that invests in ESG-ranked mining companies. This might make you think these companies’ practices align with your beliefs when actually, it might just be that they are less harmful in comparison to other mining companies. They’re not necessarily doing anything to reduce their harm just because they label themselves as ESG-aware.
Getting started on ethical investing depends on your experience and attitude to risk.
If you are comfortable with investing, you could look at:
What about the performance?
Independent research by Morningstar (How Does European Sustainable Funds’ Performance Measure Up? – Published June 2020) supports our view that performance needn’t be sacrificed due to ethical concerns, as over the last 10 years, there has been no need to sacrifice performance to ensure investments are sustainable.
In fact, research has shown that companies with strong ESG practices tend to exhibit lower volatility and superior long-term performance, highlighting the potential for ethical funds and investment portfolios to deliver both financial and social returns.
If you would like to find out more about ethical investing and our ethical financial planning services, just get in touch.
Managing your finances can be difficult, but our fund managers can help with pension advice, investment advice, inheritance tax planning, later life planning, financial planning and independent financial advice. We offer ethical investing UK-wide, and sustainable investing can be woven into any of our long-term wealth management plans.
Will I lose money?
In terms of risk, ethical investing is no different to any other kind of investing. So yes, you could lose capital as stocks, shares, and funds can go up or down. Instructing professionals in ethical investment management could be advisable if you are worried about losing money.
Can I make a difference?
Money talks! By choosing impact investments that are making a difference, you can make a difference, too. Whether you want to help solve humanity’s problems or you want to invest solely in impact funds, ethically investing can make a real difference.
The fees involved can be slightly higher because it involves so much research. It takes time for financial advisers to find funds that align with the investors values, and this time needs to be paid for.
Also, sometimes (strong emphasis on the word sometimes) ethical investment might not offer optimal returns. Sometimes you might have to settle for lower returns in order to find investments that align with your beliefs and priorities.
In a study by Morgan Stanley’s Institute for Financial Investing, investors reported that their growing interest in ethical funds was due to factors like new climate findings (53%) and the performance of sustainable investments (52%).
Plus, almost 80% of individual investors believe that it is possible to achieve financial returns with a focus on sustainability, so investors are realising they can have the best of both worlds.
ESG investing (sometimes called responsible investment) looks to analyse social, environmental and economic risks and opportunities, to guide a long-term investment approach. Ethical investing is a broader term that considers those values as well as the returns.
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