Ethical Investing – A Quick, Easy to Understand Guide
Collaborative post from Tim Day (Ethical Money)
Tim Day is an Independent Financial Adviser and the owner of Ethical Money with over 15 years experience in financial services. The growth of ethical investing makes it possible for him to work in a field that reflects his personal values as a keen nature lover and vegetarian for over 25 years (ditched the dairy 2 years ago). 10% of Ethical Money’s profits are donated to wildlife charities.
As a financial adviser, I am bombarded with information about ‘ethical investing’. OK, so I subscribe to several ethical investing newsletters but, taking them into account, I still get a lot of information.
There is a ‘buzz’ about it in the industry, which is interesting because ethical investing has been around for a long time but suddenly, it’s a hot topic. Why? Because it has changed, it’s evolved and it’s improved. It’s easier than ever to access, it performs better than before, and charges are more competitive.
My aim is to help as many people as possible get their money out of fossil fuels, out of weapons, pornography, tobacco and into companies working towards a more sustainable future for our planet.
So what is it?
If you have a personal pension or a stocks and shares ISA you are probably investing. It is possible to choose individual stocks and shares for your pension or ISA in some circumstances, but that is a risky approach for most people.
To protect yourself from losing money if a company goes bust it’s advisable to have many different companies in your ‘portfolio’. Creating a portfolio of hundreds of companies and getting it right, is a skill that I don’t have, so instead I use ‘fund managers’ who do know what they are doing.
Instead of selecting individual companies, I select well regarded fund managers, who create ethical funds and portfolios, for you to invest in.
How is an ethical fund created?
In the past, ethical investing was all about removing unwanted sectors or companies such as weapons, fossil fuels etc. You start with an existing fund or Index (eg: FTSE) and take out the companies you don’t want. This is known as SRI (Socially Responsible Investing) and is still used today.
Another method used to choose suitable investments is ESG (Environmental, Social, Governance). Companies are scored based on their environmental impact & direction, how they treat their people and how well they are governed. Companies that score highly are included. Companies that are badly run, commit human rights abuses or have a negative impact on the environment, are not.
Thirdly, there is ‘Impact’ investing. This is only selecting companies whose main business activity aims to solve an environmental or social problem. It is possible to choose from SRI funds, ESG funds or Impact funds but I prefer to recommend ready-made portfolios that include all 3 methods. This gives you a portfolio that excludes negative sectors, only includes companies making positive changes AND includes a selection of companies focused on solving global problems.
By applying all 3 ‘screening’ methods we’re starting to see good results. Ethical funds and portfolios have shown to perform as well as, or better than non-ethical alternatives. To help keep prices competitive, fund managers can apply the 3 screening methods to existing funds instead of starting from scratch.
If you were given the option of 2 portfolios and one had all the ‘usual suspects’ (oil, gas, weapons etc.) in it, and the other was cleaner and greener and they both had similar performance and charges, which one would you pick? I hope in your mind you made the ethical choice!
So how can you invest ethically?
Ethical options are popping up everywhere, but they are not all created equal. Not only do charges and performance vary but some are not as ethical as others, so beware. I’ve seen funds that claim they don’t invest in ‘controversial weapons’ but still invest in other weapons. We think all weapons are controversial, so we avoid them completely.
Some high street banks have ethical funds. So do some insurance companies like Aviva and Legal & General. There are also specialist ethical banks like Triodos that have some good offerings but charge 3% entry fee on most of their funds.
Then there’s the Financial Adviser route and you’ll find that some advisers are getting on board with ethical investing and some are not, so you might want to find someone who specialises and has taken the time to understand the ethical options available. An adviser will discuss all the options, gather lots of information and then research the best option.
To create an ethical stocks and shares ISA or an ethical pension, the appropriate ethical fund or portfolio is selected and then placed in your ISA or pension. Ethical funds and portfolios can be placed in all sorts of ‘wrappers’ including pensions, ISA, investment accounts, Bonds etc.
Can it make a difference?
Not investing in fossil fuels and weapons have obvious benefits for humankind and the environment. Some funds can provide statistics to show their reduced carbon emissions compared to others.
Impact Funds can provide regular updates on the developments of companies trying to solve global problems such as breakthroughs in medicine or farming techniques.
ESG investing encourages existing businesses to clean up their act.
It may not be perfect, but it is certainly a step in the right direction, and we need to try everything we can because we’re running out of time! Visit Ethical Money for more guidance on doing good with your money.