Investing can be a great way to make your money work harder. But like anything in life, investing is evolving and changing.
Think about it. Years ago, you had to have thousands to invest, and you couldn’t take the plunge without phoning an investment professional. Nowadays, everything can be done with just a few taps on your phone. So, who knows what investing will look like in 10, 20, or even 30 years?
Many people forecast that ethical investing may take over in the future and become the mainstream choice. But is that a realistic prediction? Could the future of investing really be ethical?
What is ethical investing?
Before we dive in and answer the main question, it’s important to understand how ethical investing works. So, what is it? Put very simply, ethical investing is about seeking long-term growth but without sacrificing your core values. It’s an approach to investing that lets you put your money to work while doing good.
Now, the tricky part is that there’s no social consensus about what’s ethical. The truth is that the term ‘ethical’ tends to mean different things to different people. Take any controversial topic, as politics shows, and you can be sure that there’ll be people on both sides of the argument. So how do you ensure your investments reflect your principles? Well, that’s the hard bit! In practice, there’s no way for ethical investing to meet everybody’s values, and as an investor, you should be prepared to make some concessions and understand that your investment plan may not perfectly align with your definition of ‘ethical.’ Obviously, if you’re not willing to make any compromise, then you could always pick your own investments. But this would typically involve a great amount of research and data analysis, which, as you can guess, would be very time consuming.
If you’re too busy or don’t feel confident enough to build your own ethical portfolio, then it could be a good idea to use the help of investment experts. And with robo investors, like Wealthify, benefitting from professional expertise is easy. All you need to do is choose how much you want to invest, select the risk level that suits you, and flick the toggle to invest ethically. We’ll do the rest, from picking your ethical investments to managing your Plan on an ongoing basis.
But what do we invest in?
Well, like many robo-investing platforms, we invest in ethical funds – think of them as hampers full of sustainable investments. Each fund is managed by an investment professional, also known as fund manager, and they all come with different ethical policies and investment strategies. Most funds will perform negative screenings where they exclude companies involved in harmful activities.
At Wealthify, for instance, we use ethical funds that screen out what is commonly known as ‘sin stocks’ – namely those firms that profit from tobacco, weapons, adult entertainment, and gambling. But we also invest in funds that exclude a wider range of activities, such as fast fashion and animal testing.
Ethical funds come with various levels of tolerance - some will remove unsustainable activities completely, while others may allow investments in companies that are involved in controversial industries, as long as no more than 10% of their overall profits derive from these activities.
You may be raising your eyebrows right now, but the argument amongst fund managers is that if less than 10% is company’s profits are earned from a harmful activity, then their involvement can be seen as negligible. Also, this deliberate threshold offers fund managers some wiggle room to create value for investors, and since it doesn’t go over 10%, the underlying ethics shouldn’t be compromised. Indeed, ethical fund managers will engage boards of directors to reduce their involvement in any harmful activities and to encourage best practice.
In addition to excluding organisations involved in harmful activities, some ethical funds will perform positive screenings. This means they’ll pro-actively seek companies that are committed to doing good.
So, how does that work in practice? Well, fund managers will examine what companies are doing and they’ll particularly focus on their practices and policies regarding the environment, society, and governance.
These three key areas form what we call 'ESG' in the investment world, and they’re here to help fund managers assess how ethical organisations really are. Fund managers will check things like how much CO2 a company produces, how diverse its workforce is, and how transparent it is when reporting to the public. Each company will then receive an ESG score, and those who manage to get an excellent ESG rating will be included in the fund.
But it’s not just ‘best of breed’ companies that get selected! Organisations that are working hard to improve their practices and policies could also be considered – it all depends on the type of funds you’re opting for.
Typically, we distinguish between two types: active and passive ethical funds.
As an investor, it’s important to know the differences between them. With actively managed funds, there’ll be a fund manager constantly monitoring what companies are doing – this is to ensure they’re maintaining their high ethical standards or implementing the right policies to improve their ESG rating.
But it doesn’t stop there. Fund managers will also be able to use their shareholder voting rights to push for change and influence how organisations are doing business. This is something passive funds cannot do.
Using a fixed and rigid ESG score that looks at things in black and white; passive ethical funds aren’t designed to drive change and tend to overlook companies that aren’t quite there yet but are working hard to do better.
So, could the future of investing be ethical?
Unfortunately, we don’t have any crystal ball and can’t predict the future. But one thing’s for sure, ethical investing is becoming more and more popular.
Let’s go back in time for a minute. It’s believed that ethical investing made its first appearance in the 1800s. It all started with religious groups, including Methodists and Muslims, who wanted to enjoy the benefits of investing but needed to follow strict guidelines and ethical practices. Then in the 1960s, ethical investing made a strong comeback as American students protested against universities that invested their fees in sectors and organisations involved in the Vietnam war and apartheid in South Africa. Institutions, like Harvard and Yale, gave in and removed these investments from their holdings.
Now, fast forward to today, and ethical investing is growing! In 2019, in the UK alone, there was an estimated £23.5 billion held in ethical investment funds – and this estimate went up by £4.5 billion in just a year1!
More recently, in 2020, global ESG assets surpassed a total of $35 trillion, and according to Bloomberg, they could surpass 41 trillion in 2022 and a whopping $50 trillion by 2025.2
What’s more, according to our own study from 2018, a third (32%) of non-investors at that time said they would consider investing if they could do it ethically – and the interest was greater amongst young people and women.3
With growing concerns about climate change, gender and racial inequality, modern slavery, and corporate corruption, it’s no wonder that ethical investing is getting more attention.
If anything, the continued rise of political engagement at a time of global crisis could be the sign that people want to live in a better and fairer world. And organisations that continue to act unethically or don’t do enough to drive positive change in society take the risk of being called out and boycotted.
The world is changing, and the investment industry will likely have to follow and adapt to the new demand by developing and offering more ethical options.
At this stage though, we’re unable to say if ethical investing will ever become the new mainstream, but the choice of ESG fund offerings is forecast to outnumber conventional funds by 20254, demonstrating its industry prominence in the years to come.
References:
1: https://www.eirisfoundation.org/mission-and-money-aligned-charities-and-responsible-investment-2-2/
3: Research conducted by Opinium Research among an online panel of 2,004 nationally representative UK adults (aged 18+), between 14th to 17th September 2018. Results have been weighted to nationally representative criteria.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
