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Broadly speaking, ethical investing takes into consideration Environmental, Social and Governance (ESG) factors when analysing potential assets to invest in. In recent years, as this area has expanded in interest and investment options, so have the terms used to describe the different types of ethical funds. We look at three different ways in how fund managers can approach ethical investing:
Initially ethical investing arose from the desire of some individuals who wanted to invest in line with their ethics and principles. The initial view was to avoid companies that were perceived to be unethical such as Tobacco or Defence companies or to avoid those that were environmentally unfriendly such as Miners or Oil Producers. This led to the perception that ethical investing offered lower returns as these were the sectors that performed well.
But ethical investing has evolved and where previously it was about avoiding companies or excluding sectors, fund managers have adopted a more proactive and inclusive approach. There are now approaches which look to support companies to make positive change in their behaviour and invest in companies which look to make a positive change to our environment and society. Studies have shown that those which implement ESG considerations can produce higher profits and share price returns over the long-term than their counterparts who fail to react.
Where in the past the focus was on avoiding investments that were undesirable on ethical grounds, there has been a notable shift towards investing in businesses that address social and environmental concerns, for example healthcare. Some funds seek out pioneering businesses in areas such as: renewable energy, low emissions technologies, ‘clean’ infrastructure and sustainable agriculture.
Remember, ethical funds have different approaches to what they consider acceptable and what they don’t, so it is important to identify one that matches your personal philosophy when choosing your investment.