Demystifying Ethical Investing

When it comes to living more sustainably and ethically we have a good understanding of how to contribute: remembering to recycle, shopping locally to reduce food miles, using low energy light bulbs and buying Fairtrade products – to name a few. The same principles can be applied to investing which has resulted in the development and expansion of an ethical investment market which is becoming increasingly mainstream; the ethical market has even been shown to outperform some conventional market indices. It’s estimated that over £19 billion is invested in ethical funds in the UK alone and over $80 billion globally [1]. Despite its increasing popularity, there still seems to be some uncertainty about what ethical investments are and their benefits.

What is Ethical Investing?

Ethical investing is led by your individual ideas, principles and what you believe to be important. The approach of ethical funds can vary - some funds will screen out investment in any companies who do not meet strict criteria, whereas others may apply positive screening; investing in companies that engage in positive social and environmental activities. There’s a plethora of options for those who want to invest responsibly. Here are a few of the main types:

  • Ethical Investing

The aim here is to avoid investing in “sin stocks” -companies profiting from products that are considered harmful such as gambling, tobacco, arms manufacturing, animal testing and adult entertainment. Most ethical funds will also make sure that they are not investing in companies involved in deforestation, intensive farming, genetic engineering or operating under oppressive regimes with poor human rights.

  • Environmental, Social and Governance (ESG)

This focusses on companies that demonstrate a positive environmental impact as they consider climate change, greenhouse gas emissions, resource depletion, waste/pollution and sustainability to determine how they plan to act as a steward of nature. The social aspect assesses how the company interacts with its employees, suppliers, clients and communities in which it operates. Whilst governance accounts for the internal running of the company.

  • Socially Responsible Investing (SRI)

The nature of the business is used to determine whether the investment is socially responsible. SRI is usually a blend of Ethical and ESG investments and its aim is that positive social outcomes result from the investments made

  • Impact Investing

This focusses on the outcome (or impact) of an organisation’s work on the planet and its people. Unlike the other options Impact Investment Funds might be happy to hold investments in companies involved in potentially controversial actions (like GM foods) providing they are taking steps towards a greener, more sustainable approach.

Though there are various umbrella categories which ethical investments are sorted into, it is often the case that there is some overlap between groups. It is therefore important to ensure that the funds you invest in match your ethical aspirations.

Considerations for Investors

If you’re thinking about investing ethically you should take the following into account:

  • Funds that match your ethical considerations may not necessarily match your attitude to risk.
  • The range of funds and asset classes is more limited.
  • Ethical funds may be higher risk as they have a smaller universe of allowable stocks in which to invest.
  • Ethical funds may be more volatile than traditional funds however this does not necessarily make them more expensive [2].
  • Research suggests that the cost to invest in ethical funds has fallen, helping them to remain competitive and attractive to investors; this is partly due to less capital cost required for research and development [3].

How Aspira can help?

Our screening criteria is to look for funds which mainly exclude companies involved in either alcohol manufacturing, animal testing, armaments, gambling, high environmental impact activities, exploitation of human rights, nuclear power/weapons, pornography and tobacco. However, the funds we use go beyond these basic criteria.

For more information on investing ethically please e-mail us at info@aspirafp.co.uk or get in touch with your financial planner.

Becky Holdsworth
Marketing Assistant, LEBC

Please remember, no news or research item is a recommendation or advice to buy. Aspira is not responsible for accuracy and may not share the author’s views. The value of an investment and the income from it may go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.

[1] https://www.wealthify.com/ethical-investing, accessed 01/10/2019

[2] https://www.yourmoney.com/saving-banking/ethical-funds-volatile-expensive/, accessed 01/10/2019

[3] https://www.bloomberg.com/news/articles/2019-03-15/ethical-funds-have-never-been-cheaper-as-vanguard-spurs-fee-war, accessed 01/10/2019

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