Five tips for the ethical investor
First published on 26 of October 2015 • Updated 25 of July 2017
The only way is ethics – that’s what many smart investors now think. The growing popularity of green and ethical investment reflects a belief that sustainability and social acceptability have become necessary for long-term growth. If you’re tempted by the notion of cash with a conscience, here’s your guide to getting started.
‘I’d like to grow my money in ethical investments, but…’ Does there always have to be a ‘but’? If you shy away from ethical investment because you think it must mean lower returns, think again. Increasingly, money is flowing towards such investments not for any altruistic reasons, but because these are seen as stronger in the longer term. For instance, investment in low-carbon technology is for some people increasingly more attractive than investing in fossil fuels, because of carbon quotas and the threat of carbon-related taxes. In a broader sense, ethical investments are often also called ‘sustainable’ investments, and the notion of sustainability is as desirable in finance as anywhere else. If it’s good for the world, the logic goes, then over time it should do better than investment which is bad for the world.
To start putting your money where your morals are, take a look at these starter tips.
Be selfish first
Yes, this is ethical investing – but your first priority has to be yourself. What do you want to achieve with your money? This isn’t about giving to charity, but a mutually beneficial financial arrangement. So initially, approach this as you would any other kind of investing – by talking to a financial adviser. You can find one who specialises in ethical investments by using the search filter at unbiased.co.uk.
Fifty shades of green?
Well, three or four anyway. You will quickly learn that some ‘ethical funds’ (to paraphrase Orwell) are more ethical than others. These can be broadly categorised as Light Green, Medium Green and Dark Green, plus something called ‘passive’ ethical funds. Note that the ‘green’ here doesn’t just relate to environmental concerns, but to all kinds of ethics.
Light Green funds avoid the obvious companies such as armaments, tobacco and gambling firms, but may well have interests in controversial industries such as those that sell fur. Medium Green funds are more rigorous, while Dark Green are the most choosy of all, avoiding stocks that have even a passing acquaintance with non-ethical practices (for instance, if another company owned by the same group were to employ child labour).
Passive ethical funds are slightly different. This is where a fund invests in a range of ordinary companies, regardless of their ethics, and then uses its position as a significant shareholder to try and address any ethical concerns by voting on resolutions. In a way passive funds are really ‘active’, in that they set out to change companies actively, rather than merely invest in those that are already ethical.
Think about your ethical priorities
It may be that you just want your investments to perform well while leaving your conscience clear – in which case, your choice of fund may depend simply on its performance and the appropriate ‘shade of green’. However, you may have a particular favourite cause or specific goal, such as eliminating child labour or reducing carbon emissions, in which case you will want to focus your investments in those areas. This is another issue to discuss in detail with your financial adviser – a specialist will be able to do all the research for you, and identify funds that genuinely deliver both for investors and the causes they support.
Don’t confuse the cause with the investment
It’s easy to suffer from unconscious bias when it comes to something you care about. If the cause looks particularly important or noble, then you may be tempted to give less scrutiny to the quality of the investment itself. Again, this isn’t about charity – you can do that separately. This is another reason to get an IFA on board, as they will bring vital objectivity and ensure that decisions are made with the head, not just the heart.
Use a specialist adviser
Many advisers listed on unbiased.co.uk specialise in ethical investments. First search for your nearest advisers using your postcode, then click the Ethical Investments filter to find your nearest specialists. It’s a good idea to ask each one about their ethical credentials – don’t just take their word for it. Ask about their own corporate social responsibility (always a good indicator) – see if they recycle their paperwork and have energy-efficient offices, for instance!