Ethical investment - making money with a clear conscience

Defining ethical

What is being ethical? We all have some idea of what it means to be ethical in our approach to others, to animals and to the environment. But what is ethical investing and can it work for you?

Ethical investment, often known as Socially Responsible Investment (SRI), can be confusing as there are so many shades of “green” funds available through unit trusts, open ended investment companies and investment trusts. Some funds are more environmentally friendly than others.

Companies also have different approaches to defining ethical. For example, British American Tobacco would not be classed as ethical by organisations such as Cancer Research. However, BAT has gone a long way to improve working conditions, with fairer wages and improving human rights issues in its overseas operations.

If you want to invest ethically, you should speak to an Independent Financial Adviser (IFA) about what sort of investment would work for you and best suit your own principles.

Why should I invest ethically?

If you have any aversions to gambling or pornography you may not want your money invested in a mainstream fund which in turn invests in companies who work in such industries.

As a conscientious investor, you can help companies take a more responsible attitude to human, animal and environmental rights. You can also help companies developing products to save the environment by choosing to invest in them.

Many people like to invest money in ethical funds for their children, as they want a better world for their children and grandchildren to grow up in.

How can I find out which companies have ethical policies?

Many UK and global companies adopt strict disclosure policies, which means they are making information about their business practices publicly available. You can access this on websites or company literature.

However, not all companies do this and it can be difficult to get this information, let alone make an informed choice about investing in the company. Organisations such as Greenpeace, Amnesty International, the World Trade Organisation and EIRIS – the Ethical Investment Research Service – can furnish you with information or point you in the right direction (please see end of guide for contact details).

EIRIS often advises fund managers on what global companies are doing. It has also defined some key criteria for assessing various business practices and how these can impact on human rights or the environment.

Also, the UK Socially Responsible Investment Forum (UKSIF) can help you understand issues affecting SRI investment. This organisation has been heavily involved in promoting and developing SRI.

Buying shares

You can speak with your IFA about buying shares in companies which you think are ethical or environmentally friendly. 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.

How funds define ethical

Fund managers have different ideas about which companies would be the most socially responsible and ethical, while providing good returns. Managers can select their stocks in a variety of ways and this is something you should discuss with an IFA when trying to decide which fund would suit you best.

One: negative criteria
Some funds actively screen out companies listed on the UK or other global stockmarkets that are involved in businesses such as tobacco production, deforestation, 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.

Two: positive criteria
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.

Three: engagement
Other funds “engage” with companies by using the manager’s power as a shareholder to push for changes to the way it deals with human rights, the environment and corporate governance issues. This means managers will not screen against a good-performing company to the disadvantage of investors, but will try to influence the company for good.

As an example, British Petroleum has gone a long way to clean up its act, which makes it one of the most ethical companies in its sector and therefore a suitable investment for many SRI managers.

Myth: Ethical funds do not perform well
Perhaps you have been put off ethical investing, believing that if a fund screens out all the tobacco, gambling and arms companies in its market, then it will underperform mainstream funds which invest in any company within its investment remit.

There can be some mileage in this argument. Oil and Tobacco stocks usually do well, especially when stockmarkets are not performing well. A fund screening out these companies could cut investors off from the performance of these stocks.

However, engagement goes a long way to helping investors access the benefits of some of these top performers. By investing in the best of class/best of breed companies who are attempting to be more ethical, managers can make a difference while giving investors access to possible out-performance.

Moreover, ethical funds have performed largely in line with their peers over the medium term suggesting that many funds that have strict screening policies have not damaged their investors at all.

A further argument is that as the World Trade Organisation begins to crack down on companies exploiting people, animals or the environment, companies tainted by fines and negative press will start to underperform.

However, well-run companies with strong ethical principles will not be tarnished by future problems. As a result, they are more likely to be tomorrow’s performers, along with many start-up companies producing sustainable energy products that will shape the way we live in the future.

Where now?

If you have decided that ethical investment is for you, it will be best to take advice from an IFA about how this should be done.

Some Independent Financial Advisers specialise in SRI, but any IFA can access data stating what SRI funds invest in, and then sit down with you to discover what sort of ethical investment would suit your own risk profile and ethical views.

Further contact info:
Ethical Investment Research Service
Website www.eiris.org Tel. 020 7840 5740.

UK Social Investment Forum (UKSIF)
Website www.investability.org Tel. 020 7405 0040.

For further information on savings and investment, please contact your IFA. To find an IFA in your local area, please use our ‘find an IFA’ search which enables you to search for an IFA based on your home or work postcode and a range of other criteria such as areas of advice provided, qualifications and how you can pay for the advice.

This guide was created by IFA Promotion Ltd (unbiased.co.uk) and has been approved by a person authorised and regulated by the Financial Services Authority. With many investments the value of your investment may fall as well as rise and you may not get back the amount you invest. The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trademarks of IFA Promotion Limited.

October 2010