What is... | October 31, 2017

What is ethical investing?

You can avoid putting your money in companies that behave badly and invest in line with your values instead


Who’d want to help finance the fur trade or the destruction of the rainforest?

Well, many people are unwittingly doing just that through their investments or retirement plans.

Fund managers working for banks or pension providers and therefore investing money on your behalf may be ploughing your cash into companies that behave badly.

But there is a way to invest your money that’s more in line with your values and it’s called ethical investing.

Steering clear of "sin stocks"
Ethical investing is a catch-all phrase that covers a number of possible investment options that meet social and environmental concerns. 

Ethical investments may avoid so-called “sin stocks” (typically tobacco and arms manufacture), and the shares of companies that damage the environment or are badly governed. This is known as negative screening. Other approaches look at investing in firms that actively support various social or environmental goals. This is known as positive screening. 

Depending on the criteria used, ethical investment can have various names. Commonly used terms are socially responsible investing, sustainable investing and impact investment.

As with standard investment approaches, many companies meeting various ethical criteria can be grouped into indices. The FTSE4Good is one example; ING is included in this index. Funds are available that are made up of companies that meet ethical criteria and people can invest in these just as they would in any other fund.

According to the Investment Association – a trade body that represents UK investment managers – ethical funds often have a committee that creates an approved list of companies from which the portfolio manager can select investments. 

The EIRIS Foundation, a charity which provides free and objective information on ethical finance, also helps funds to monitor their investments. 

Growing in popularity
Ethical funds have been around for decades – the UK’s first mainstream one was launched in 1984 by Friends Provident, and the Pax World Fund was started in the USA shortly after the Vietnam War – but the sector has gathered pace in recent years.

EIRIS says that more than £15billion was invested in green and ethical funds by UK investors in 2015, up from £6 billion in 2005. EuroSIF, a European association for the promotion and advancement of sustainable and responsible investment across Europe, cites annual growth rates of 14% to 57% for the main categories of ethical funds they follow. 

In Australia, meanwhile, the amount managed in funds promoted as ethical (or responsible) roughly quadrupled to $622 billion from 2014 to 2017.

Millennial money
A Morgan Stanley survey indicates ethical investing may be driven by the Millennial generation. The 200 investors aged 18-35 it polled were more than twice as likely than the overall sample to have put their money into companies with social or environmental goals.

Investment firm Schroders has reported similar findings.

Investing with a clean conscience does not necessarily mean lower returns. While the original Friends Provident fund may have been dubbed the Brazil fund – “because you’d have to be nuts to invest in it” –  a 2017 report suggested ethical funds actually performed better than non-ethical funds over the previous five years.

Behaving ethically with money doesn’t just end with investments, though. You can put your money in current and savings accounts with banks that have strict ethical boundaries, and you can take out ethical mortgages too.

Environment

eZonomics team
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