What is ethical investing and should you consider it?

From ditching plastic to eating less meat, people are becoming more aware of the impact of our actions on our society and environment.

But have you ever thought about the impact the money you have invested, maybe in a pension or an ISA, has? Are your investment choices in line with your ethics and beliefs?

Ethical investing is when you or the person managing your funds makes investment decisions based on values, rather than just on risk and returns.

The issues that you might consider when selecting companies and assets for ethically investing can include things like workers’ rights, climate change, sustainability, arms, tobacco, equality and gambling.

An ethical revolution

Some experts believe the Coronavirus pandemic could trigger a huge change in the financial world. Research from ethical bank Triodos in January 2021 found that almost half of Britons plan to be more ethical with their money going forward.

There are lots of different approaches to ethical investing, some involve screening out certain types of organisation or activities, and others use your money to make positive impacts.

In this growing area, new investors aren’t short of ethical options. Funds are sometimes assessed on a scale from light green to dark green, where light green might have some ethical principles or perhaps avoid companies making money from certain activies such as tobacco, pornography or arms, where dark green funds would apply much stricter criteria.

Key terminology

Some of the key terms you might want to become familiar with in order to understand ethical investing include:

SRI  –  Socially responsible investment – is a strategy that considers environmental, social or ethical impacts of an investment along with the financial returns.

ESG – Environmental, Social and Governance investing – is where environmental, social and governance factors are integrated into investment decision making, often to reduce risk. This could look at issues such as water management, are health and safety policies effective, how are workers treated, and whether the company values innovation as these are believed to be financially relevant. The idea is that the more sound a company is in all areas the more likely stocks will increase in value.

Impact investing – delivers societal benefits as well as financial returns.

Sustainable investing – focuses on environmental and sustainability issues to address climate change and other issues as well as providing good returns. 

Screening positives and negatives

In order to assess whether companies should be allowed into an ethical assessment portfolio they would be screened. They can either be screened positively or negatively.

Negative screening is where you exclude things, such as alcohol companies or those in oppressive regimes.

Positive screening would include companies for their positive social impacts, both on their environment, employees and wider society as a whole.

Why invest ethically? 

Making more ethical choices with your money might not just be good for wider society, but could be good for you too.

Ethical investments have been outperforming non-ethical funds in recent years, in fact in July 2020 Moneyfacts revealed that ethical unit trusts had grown by 4% in the 12 months to 1 July 2020 compared to a contraction of 1.5% for non-ethical trusts.

It is however important to remember that the value of investments can go up as well as down, and a qualified independent financial adviser can help you with your investment decisions.

How to invest ethically

You can choose your own investments based on companies that you believe are in line with your own ethics and beliefs. It is however time-consuming, and will need to be monitored regularly both for ethics and returns.

Alternatively, you can use an investment platform to choose and manage your ethical investments that lists ethical funds based on your chosen principles and criteria.

How you choose to invest may depend on your confidence with investing, your skill, your attitude to risk and the size of your portfolio.

At Amethyst IFA our independent financial advisers can help you explore ethical investment and manage your funds, so don’t hesitate to get in touch.