Why do we invest? For many, the answer is straightforward: ‘I invest to give my money a chance to grow.’ But is this the only purpose of investing? Not for everyone! Investing can be about so much more than just trying to make money. Not only can it benefit society, it can also help protect the environment. A good way to make an impact with your money is to buy ethical investments – but how do you ensure what you invest in is ethical enough? Here’s a short guide to help you choose your ethical investments.
Definitions of ethical
What does ‘ethical’ mean? According to the Collins Dictionary, the word ‘ethical’ relates to beliefs about right and wrong. This sounds very simple, but in practice, it’s another story as nobody can fully agree about what’s morally acceptable. Take controversial topics, like capital punishment, abortion, or war, and you can be sure to find people on both sides of the argument. ‘Ethical’ means different things to different people and reaching a social consensus on what’s morally right and what’s not is almost mission impossible. This is a challenge ethical investing – also called sustainable investing or SRI (socially-responsible investing) - has to deal with too: satisfy the masses’ vision of ethics. Quite a Sisyphean task, especially when there’s no way to meet everybody’s expectations! So, inevitably, ethical investing comes with an element of compromise and investors must be prepared to make some concessions.
What are ethical investment funds?
When it comes to investing ethically, there are two ways of doing it. You can do it all by yourself and pick your own ethical investments, but this method requires thorough analysis and extensive research into companies’ code of ethics and conduct. If you’re too busy to lead such assessments, you can choose to invest in ethical funds. What are these, you ask? They’re like hampers full of ethical investments that have already been selected by investment experts.
How do ethical investment funds work?
Ethical investment funds are an effortless way to invest, but these funds aren’t created equally, so make sure to check how they work before you get started. If you're looking for the best ethical funds, make sure you do your research.
Negative & positive screenings
Ethical funds will typically perform negative screenings – meaning, they’ll exclude activities that are considered harmful to society and the environment. But one thing to keep in mind is that exclusion policies can vary a lot from one fund to another. Some will only remove ‘sin stocks’ – any company involved in the following sectors: tobacco, gambling, weapons, and adult entertainment. Others will carry out extra screenings and exclude activities like animal testing, nuclear power, and deforestation. Ethical funds will also have different levels of tolerance: some remove unsustainable activities completely whilst others allow a tolerance and invest in some companies so long as no more than 10% of their overall profits come from such activities.
Screening out activities and sectors isn’t the only thing ethical funds can do. Many will also proactively seek out organisations that are committed to operating in a sustainable way – this process is called positive screening. Fund managers will look at the environmental, social, and governance (ESG) practices of each company they intend to include, and they’ll rate them on how well they’re doing in each area. Things like how much energy they consume, how well they champion gender equality, and how transparent they are with their stakeholders and shareholders will be carefully assessed and each organisation will be given a rating. The higher this score is, the more likely a company is to be included in the fund. But funds aren’t only looking for ‘best-of-breed’ businesses, they’re also often willing to invest in companies that are working hard to improve their ethical standards.
Active vs passive
Ethical funds can either be active or passive. If they’re actively-managed, you’ll have a fund manager constantly monitoring what companies are doing to make sure that they maintain high ethical standards. But more importantly, these fund managers can push for change. How do they get to do this? If a fund has got a reasonably sized company shareholding, fund managers can use their shareholder voting power to influence and engage in a dialogue with the board of directors. This allows them to influence ESG policies, as well as the overall strategic direction. Since actively-managed funds involve a great amount of work, they tend to cost a bit more compared to other types of funds. Passive ethical funds, on the other hand, are quite cheap, but there’s less likely to be resource to dig into company’s credentials and carefully consider each investment on its merits – instead they use a rigid scoring system that looks at things in black and white.
Investing in ethical funds is easier than you might think. You can either go directly to a fund provider, like Edentree or Royal London, or you can opt for a robo-investing platform that’ll do all the hard work for you, from picking the ethical funds to adjusting your investment plan if needed. At Wealthify, we offer ethical plans that can contain up to 20 active funds carrying out negative and positive screenings. Find out what’s in our ethical plans here: What's really in an ethical investment portfolio?
And if you’ve any questions feel free to contact our customer service team!
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
