Guides: investments
Ethical investment
We all have some idea of what it means to be ethical in our approach to others, to animals, to the environment. But what is ethical investing and will it produce good returns as well as salving your investment conscience?
Ethical investment, often known as socially responsible investment (SRI), can be confusing as there are many shades of ‘green’ funds available through unit trusts, open ended investment companies and investment trusts.
‘Ethical’ is often used as a catch-all term that includes the environment, and what you might more normally consider as ethical decision-making such as avoiding tobacco, arms, alcohol companies for example.
At a basic level, some fund managers will do whatever they can to avoid any investments that have unethical connotations (often known as ‘dark green’ funds). Whereas, some will allow investments as long as only a certain percentage of their business, say 10% or less, is involved in potentially unethical areas (‘light green’ funds).
How does a fund manager make his investment decision?
There are the different ways in which the fund manager makes his investment decisions. The most common styles are enforcing negative criteria or positive criteria.
Negative screening: Some funds actively screen out companies listed on the UK or other global stock markets that are involved in businesses such as tobacco, alcohol, de-forestation, the arms trade and animal testing. This is known as negative criteria. Not all managers screen for the same things – a point you should discuss with your IFA.
Positive screening: Other funds prefer to use positive criteria such as looking for companies that produce things to help the environment, such as sustainable energy or recycling companies.
Engagement: Some funds ‘engage’ with the companies they invest in by using the fund manager’s power as a major shareholder to push for improvement in the company’s policies on human rights, the environment and corporate governance issues.
How can I find out which individual companies have ethical policies?
Some UK and global companies have adopted strict disclosure policies, which means they are making information about their business practices publicly available. You can access this on their websites or via company literature. However, not all companies do this and it can be difficult to get this information.
Organisations such as Greenpeace, Amnesty International, the World Trade Organisation and the Ethical Investment Research Information Service (EIRIS) can supply you with information or point you in the right direction. Also, the UK Socially Responsible Investment Forum (UKSIF) can help you understand issues around SRI investment as this organisation has been heavily involved in promoting and developing SRI.
Buying shares
If you want to build up your ethical portfolio yourself, an IFA specialising in ethical investment should be able to advise. However, unless you are familiar with buying individual shares, this can be expensive and time consuming. It may be better to ask your IFA to recommend an ethical fund where the manager can do the stock selection, management and research for you.
What’s the performance like?
Perhaps you have been put off ethical investing believing that if a fund screens out unethical companies then it will underperform mainstream funds, which invest in any company within its investment remit.
The jury is still out on this argument. Historically, ethical funds tended to have a bias to smaller companies, as it was only these companies that met some of the ethical criteria.
However, nowadays well run companies with strong ethical and environmental principles face less risk of regulatory fines, environmental clean-up costs or shareholder backlash and are more likely to be the companies delivering the products and services required by today’s investing community.
