Ethical lifestyle

5 definitions of ethical investing

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Launched in 1984, the UK’s first ever ethical investment product, the F&C Stewardship Growth fund, was nicknamed the ‘Brazil Fund’, owing to fund managers’ consensus that you’d have to have to be nuts to invest into it. Fast-forward to today and ethical investing is not only relatively mainstream, but has even been shown to outperform some conventional market indices. The Ethical Investment Research Services (EIRIS) estimate that today over £16 billion is invested in ethical funds in the UK alone. The global figure is likely to be in excess of $80 billion.

 

This growing popularity inevitably means more choice for consumers. From a single fund in 1984 there’s now a plethora of options for those looking to invest responsibly, and a number of different approaches to the screening and selection of ‘ethical’ investments. So, what does ethical investing mean anyway?

 

Here are the 5 main types and what each one means.

 

  1. Ethical Investing: the focus here is on what’s called ‘negative screening’, i.e. aiming to avoid investing in the ‘bad stuff’. This typically refers to so-called “sin stocks” – companies that profit from sales of products considered harmful such as tobacco, gambling, weapons and adult entertainment. Most ethical funds will screen for a variety of other activities too, such as involvement in deforestation, intensive farming, genetic engineering, or companies operating under oppressive regimes or in countries with low human rights or labour standards. Exclusion policies will vary between fund managers, with some activities fully screened out, and others assessed on a case-by-case basis. Many factors will be considered, including what percentage of the company’s profits come from harmful activities and what the company is doing to shift their focus to more principled activities.

 

  1. Environmental, Social and Governance (ESG): focusses on companies that demonstrate great behaviours in terms of their environmental impact, their social responsibility and the quality of their internal governance practices. Ethical fund managers use a complex scoring process to identify ‘best of breed’ companies to include in their funds. On the environmental side, fund managers might look at how much energy a company wastes and how its activities affect the environment. Concerning the social part, managers may check whether a company donates to charity, champions gender and race equality, gives back to its communities and insists its suppliers hold similar values. When looking at governance practices, things like the ability for shareholders to vote on important issues and the accuracy and transparency of reporting are considered. This process is known as positive screening and ensures that investors’ money supports companies with the highest standards of practice.

 

  1. Socially Responsible Investing (SRI): aims to generate positive social outcomes through investment. SRI is a blend of Ethical and ESG investing. Fund managers first screen out ‘sin stocks’, before applying an ESG scoring system to identify companies that demonstrate good environmental, social, and governance policies. This blend of positive and negative screening aims to capture the best of both worlds and, some argue, is a more ethically robust approach.

 

  1. Impact Investing: focusses on the outcome (or impact) of an organisation’s work on the planet and its people. Impact investment funds might therefore be happy to hold investments in companies involved in potentially controversial activities, like producing genetically modified (GM) foods, provided those companies can demonstrate they are taking positive steps to adopt a greener, more sustainable approach and lessen their impact on the environment.

 

  1. Sustainable Investing: is a broad approach to ethical investing that encompasses an element of all of the above forms of ethical investing, including negative screening, positive screening, and a focus on the output and impact of companies’ operations on the environment. It’s probably the most popular approach with today’s socially conscious investor.

 

Whatever ethical investing means to you, these days there’s a broad range of options available to ensure that your money is invested in companies that operate in a responsible way and avoid activities detrimental to society and the planet we live on.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.

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