Investing ethically is something that more and more people are becoming interested in doing. And for those that aren't in the know, this is when you only invest your money in companies that are having a positive impact on the world – and this could be in various ways.
And more recent figures from 2023 indicate that investing ethically is continuing to be a priority for investors. According to Finder.com, 57% of UK investors hold an ethical investment, and 77% of those who intend to invest but haven't already plan to do so ethically. This percentage equates to just over 23 million adults in the UK.
If you want to use your money to do good while giving it an opportunity to potentially grow, here are some tips to help you dip your toe into the world of ethical investing. After all, it could be a lot easier to do than you think.
Know your principles
Being 'ethical' can be defined as doing what’s morally right. But although it sounds simple, in practice, behaving ethically isn't always easy.
The main difficulty is that the word ‘ethical’ might mean very different things to different people. Meat consumption, alcohol, animal testing and GM crops are just a few things that can polarise opinion and be perfectly acceptable to one person whilst offending someone else.
Knowing your own values will help you choose your ethical investments, so start by asking yourself: what are the activities you’d like to avoid investing in?
As an example, at Wealthify we build Investment Plans for our customers and will manage them for them based on how much they want to invest, what their appetite for risk is, and whether they want to invest ethically or not. With our Ethical Plans, we aim to exclude the following industries: tobacco, gambling, weapons, and adult entertainment.
However, try to keep an open mind when choosing what to invest in. If you use an investment service, like Wealthify, it's very difficult to cater for every taste as everyone has different beliefs on what is and isn't acceptable. Plus, flat-out excluding every company and activity that go against your beliefs could limit your investment options, and therefore, your potential returns.
Investors who want to go 'ethical' might have to accept a certain level of flexibility and decide where they’re happy to compromise. Reassuringly, however, is that ethical investing isn’t just about screening out organisations. It’s also about supporting companies that are committed to improving their ethics.
As an example, an ethical fund (a basket of investments you put your money into) could include an oil company that is investing in renewable energy in a bid to reduce its environmental impact.
Choose the investing route you prefer
Now that you know what you want to exclude from your investments, it’s time to choose the investing route that suits your needs – like your investment experience and the amount of spare time you have.
You could pick your own ethical investments, but this requires extensive, regular research about what different companies on the stock market are doing to have a positive impact on the world. This could be how they're helping to protect the planet, or make society fairer.
Alternatively, you could choose to invest in ethical funds. These 'funds' are like baskets full of ethical investments (e.g. shares, bonds, and thematic funds) and they’re an easy way to be invested in a large array of ethical organisations.
But, if you’re too busy to do it yourself, you could always get the help from online investing services, like Wealthify. These will have a team of experts who will create and manage an ethical portfolio for you, and regularly assess the companies included in your Investment Plan.
Learn about how ethical funds work
If you decide to invest in ethical funds, on your own or via a digital investing platform, you’ll quickly find out that they come with different characteristics and rules.
Most of them will perform negative screenings to exclude the ‘bad stuff’ but their exclusion policies can vary considerably.
Some will focus on removing the so-called “sin stocks” (aka, tobacco, weapons, gambling, and adult entertainment), while others will carry out a wider screening process and exclude other activities – such as deforestation, alcohol, and intensive farming.
Ethical funds will also have different tolerance thresholds. Some will completely exclude companies that profit from harmful activities, and others will be willing to invest in such organisations provided that no more than 10% of its overall profits derive from these kinds of activities.
In addition to screening out certain companies and activities, many ethical funds will proactively seek out organisations that are striving to have a positive impact on the environment and society.
And to ensure that the companies they invest in maintain high ethical standards, fund managers will monitor and assess their practices. They will consider a large range of factors, like how much waste they produce, how well they treat their staff, and how transparent they are with their stakeholders and shareholders.
So, if you're looking for the best ethical funds, make sure you do your research before you get started.
Diversify your investments
It’s often assumed that ethical investing offers less choice, but the truth is that there are hundreds of ethical investments available on many different financial markets, meaning you don’t have to put all your eggs in the same basket.
Just like standard investing, you could mitigate risk by spreading your money across a range of assets and regions. This means you're not just relying on just one company or type of investment to do well, reducing the chance of you losing all your money.
Consider opening an ISA
If you’re interested in investing ethically, consider doing it in a tax-efficient way. It’s not always well-known, but you can invest responsibly with a Stocks & Shares ISA. In fact, many investment services, like Wealthify, offer an ethical Stocks and Shares ISA.
If you opt for this route, you can invest up to £20,000 for the 2024/25 tax year, and you won’t pay tax on any earnings you receive. This means you'll get to keep more of your returns whilst doing your bit for the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.
