Investing ethically

What is Ethical investing?

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:

  • Socially Responsible Investing (SRI) - This refers to the practice of integrating social and environmental factors within the investment process to avoid companies which have a negative impact on the environment and on society. This type of investing applies a negative screen, filtering out companies which are seen as unethical or not environmentally friendly. Once the filter is applied the investment objective is generally to maximise returns
  • Impact Investing - In a similar way to SRI, Impact investing integrates social and environmental factors in investment analysis but goes further by making investments in companies whose objective is to produce social and/or environmental benefits alongside financial return. This approach applies a positive screen looking for companies which aim to generate a positive social and/or environmental impact. Investment returns are ultimately secondary to the social theme or impact.
  • Responsible / Sustainable Investing - Is an approach which aims to incorporate ESG factors into investment decisions in order to better manage the risks and generate sustainable long term returns. Unlike SRI and Impact investing, these approaches look at the corporate behaviour and governance of a company. Responsible investing can be incorporated by investors whose sole purpose is financial return.

Will I sacrifice good performance if I choose an ethical fund?

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.

What do ethical funds invest in?

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.