What is ethical investing?


Ethical Investing, also known as sustainable, “green” or social investing, is any investment strategy which seeks both financial return and social or environmental benefits.
But is it really possible to deliver both?

How you invest can make a difference

Ethical investing may date back to the Quaker movement which prohibited members from participating in the slave trade as long ago as 1758. Since then, the trend has developed, first by shunning guns, alcohol and tobacco, and then with a political slant. A campaign against investment in South Africa helped bring an end to apartheid.

These days, the environment has become a key focus for ethical investment. Ethical investors tend to avoid the polluting smokestack industries, preferring to invest in ’clean’ technologies. The way companies treat their workforce is also a concern for the ethical investor.

Ethical investing can break down into ESG (environmental, social and governance) and SRI (socially responsible investing) as well as values based, socially responsible and impact investing. It has certainly become a force to be reckoned with. Many businesses have become careful to demonstrate their social credentials. Being identified as a ‘bad’ business can cause investors to sell, and share prices to fall.

Ethical investing has become a pressure tool to influence the way businesses work. But although its effectiveness at driving changes in corporate behaviour is no longer in question, does investing with your conscience mean that your returns suffer?

The profits of principles

It seems that you can invest for returns without forgetting your principles. It is hard to compare ethical with general holdings as the lines have become blurred, but according to reports quoted by Moneyfacts in 2017, ethical funds combined actually performed better than non-ethical funds over the previous five years.

The reasons why are open to debate. Ethical investors have always avoided the traditional ‘sin stocks’ such as tobacco, alcohol and armaments. These are no longer the safe performers they once were, and ethical funds have benefitted compared with mainstream investments.

But there is a more positive side to ethical investment. Companies which behave responsibly and adopt environmental, social and governance principles can be seen as better run, and more in tune with modern sensibilities. Green or social credentials may be a sign of a more forward looking business that can provide better long-term prospects.

Past performance is not a guide to future performance.

How to invest ethically

You can of course invest directly in green businesses, but knowing for certain whether a particular company really is as ethical as it first appears might not be so simple. That promising bio-technology company which is developing a cure for the common cold sounds ethical, but it may use animal testing.

A company which scores highly for its environmental protection practices and conservation may fall down when it comes to employment practices and treating workers fairly, and vice versa. Because it can be almost impossible for you to be certain whether a particular company is operating ethically or not, most ethical investments are held through managed funds.

These operate just like conventional funds. They buy baskets of stocks which are shared among investors, but before they make the decision to invest in a company, an ethical fund manager will run checks to find out if it really is as ethical as it appears.

This allows you to look at the particular ethical criteria that are important to you. There are now dozens of ethical funds, and it should be possible to find one which invests in line with your standards.

At Continuum, we would be happy to help you find an investment which will not compromise your principles, or your need for profit.

The value of investments can fall as well as rise and you may get back less than you invested.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources:

thisismoney.co.uk – Ethical investing: Can you make money from being good? – 12th October 2012

moneyfacts.co.uk – Ethical funds perform strongly once again – 21st August 2017

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