Ethical investing is becoming increasingly popular. According to our study, a third (32%) of non-investors would consider investing if they could do it ethically1. And yet, despite this growing interest, many things about ethical investing remain unknown. So, to help you get familiar with ethical investing, here’s a quick guide answering five frequently asked questions.
What is ethical investing?
When you invest ethically, you typically give your money a chance to grow whilst supporting organisations committed to driving positive change in society. This is usually done by filtering out harmful activities and including companies that are working hard to have a positive impact on the environment and society.
What are ESG, sustainable, and impact investing?
Ethical investing is a popular term to qualify sustainable approaches to investing. But it’s not the only one. There are many other terms that are used in the industry, and the most common ones are ESG, sustainable investing, and impact investing. So, what are these?
ESG investing aims to identify companies that are striving to do good. Investment professionals will look at a large range of criteria encompassing the three key pillars of ESG: environmental, social, and governance. They’ll check things like how many carbon emissions a company produces, how diverse its workforce is, and how transparent it is when reporting to the public. Companies will then be given a rating. The better a company’s ethical standards are, the higher its ESG score will be. But it doesn’t stop there! Companies will be constantly monitored to ensure their standards are maintained.
With sustainable investing, harmful activities are excluded and companies with excellent ESG scores are proactively sought out. By requiring both negative and positive screenings, this type of investing is often seen as a more ethically sound approach.
Impact investing focuses on the outcome of the investment. Often considered as a subset of sustainable investing, it doesn’t necessarily seek to exclude all industries that can cause harm. A company, involved in a controversial sector, will, within reason, be considered if it can demonstrate that it’s working hard to improve its standards.
What activities do you exclude in your ethical Plans?
At Wealthify, we invest in ethical funds (hampers full of sustainable investments) that aim to exclude ‘sin stocks’: gambling, adult entertainment, weapons, and tobacco. But the list isn’t just limited to these four sectors and some funds will consider a wider range of activities, such as intensive farming and nuclear power. Exclusion criteria will also vary from one fund to another. Some funds will completely exclude harmful sectors whilst other funds will choose to invest in organisations profiting from controversial activities, as long as no more than 10% of their overall profits derive from such activities. Fund managers argue that if less than 10% of a company’s profits are earned from a harmful activity, their involvement in it could be considered negligible.
What do you include in your ethical Plans?
Our ethical Plans can contain up to 25 investment funds, and these funds invest in companies that are committed to doing their part for the environment and society. How do these funds select these companies, you ask? They simply look at their ESG practices and rate how well they’re doing in each area. Companies with a high ESG score will then be added to the fund. However, it’s not just ‘best-of-breed’ companies that get selected, organisations that show great commitment to improving their practices and standards will also be considered. An example would be a fast food chain introducing healthier options. The work doesn’t stop there though. After selecting companies, fund managers will keep a close eye on their activities to make sure their standards don’t fall below what is expected. If a company lets its ESG rating slip, fund managers will remove it from the pool. More importantly, at Wealthify, we will also monitor the ethical funds we use to ensure the sustainability of your Plans.
Does ethical investing mean lower performance?
Ethical investing has been around since the 18th century, and yet there are still many misconceptions about it. For instance, it’s often assumed that ethical investing comes with lower returns, compared to other types of investing. But evidence suggest that ethical investing tends to perform as well as other types of investing. Let’s take the FTSE All Share, which lists over 600 UK companies, and its ethical counterpart, the FTSE4Good. Between January 2009 and October 2019, the FTSE All Shares returned 75.6% whilst the FTSE4Good returned 75.0%2 – needless to say, the difference is minuscule. So, if you decide to go ethical, you won’t need to compromise on potential returns.
1: Wealthify ISA survey - Research conducted by Opinium Research between 9– 12 March 2018 amongst 2,010 consumers
2: Data from Bloomberg
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.