If you want to fight climate change and make a positive difference in society, there are many things you can do to help, whether it’s recycling, reducing your carbon footprint, or changing your diet. But what about your money? Are you sure you’re putting it to good use? If you’re looking to build wealth over the long-term, perhaps ethical investing could be the answer. Here are five reasons why it could be worth investing ethically.
It’s a great way to make a difference
Ethical investing is about giving your money a chance to grow while making sure your investments are having a positive impact on society and the environment. By investing ethically, you get to choose where your money is going, and you can exclude specific activities or sectors. If you don’t want to do the selection yourself, that’s fine, there are many digital investment services that will build you an ethical portfolio with the right mix of investments. At Wealthify, we invest in ethical funds (hampers full of sustainable investments) that screen out a number of harmful activities, such as tobacco, weapons, adult entertainment, gambling and much more – if you want to see what’s excluded from our Ethical Plans, check out our blog: https://www.wealthify.com/blog/what-s-really-in-an-ethical-investment-portfolio.
Ethical investing isn’t just about removing harmful activities, it’s also about seeking out companies that are committed to doing good. Again, you can either do your own selection based on your preferences and thorough research, or you can use a robo investing platform that’ll do the picking for you. At Wealthify, we use ethical funds that are actively managed to ensure your money is invested in companies that are truly making a difference. This means that before investing in any companies, fund managers will typically examine their ethical standards. If companies can demonstrate excellent environmental, social, and governance (ESG) activities, or are committed to improving their practices and policies, then they’ll be selected. But it doesn’t stop there, as each company will be monitored and if their ethical standards slip, they will be removed from the fund.
It’s often assumed that ethical investing cannot really make a difference, but that’s a myth. It can push companies to change and adopt more ethical practices. Ethical funds that are actively managed can use their shareholder voting power to compel companies to do better and work towards higher ethical standards. And if a fund holds enough shares, then they could even try and influence the overall strategic direction of the business. Things may not change overnight, but with its growing popularity, ethical investing could be exactly what we need to urge companies to change. There are already a number of cases where ethical investing has helped drive change in society. For instance, in January 2020, BlackRock, one of the largest investment management firms, joined a pressure group calling for fossil fuel producers and other polluting companies to do more to reduce their emissions1.
It could be the future of investing
Ethical investing is becoming increasingly popular, and although we don’t have a crystal ball, there’s a real chance it could become mainstream in the investing world. Ethical investing made its first appearance in the 1800s, started by religious groups who wanted to benefit from the power of investing but needed to follow strict rules and ethical practices. In 1960s, ethical investing made a comeback as students in the US protested against universities that invested their fees in sectors and organisations involved in the Vietnam war and apartheid in South Africa.
Fast forward to today and the popularity of ethical investing is soaring – due to the growing concerns about climate change, gender and racial inequality, modern slavery, corporate corruption, and healthcare. The world is changing as people are asking companies for more sustainability, accountability, and transparency. Naturally, we can imagine that the investment industry will need to adapt to the new demand, and although we can’t say for sure whether ethical investing will take the lead, there are some signs indicating that change is coming. According to Morningstar, around £27bn was put in ethical funds in Europe in the first three months of 2020, whilst other types of funds saw about £133bn withdrawn2. Also, the choice of ESG fund offerings in Europe is forecast to outnumber conventional funds by 2025, demonstrating that ethical investing could become the prominent way of investing in the years to come3.
There’s plenty of choice
Investing ethically doesn’t mean you have to compromise on choice. It’s not very well known, but there’s a wide range of ethical investments across the globe that you can buy as an investor. Not only can you invest in shares, bonds, and alternatives, but you can also choose to put your money in thematic funds. The particularity of these funds is that they’re focused on specific themes, such as gender equality or green energy, and they will invest in companies that are having a positive impact in these areas.
With all these investments available, it’s possible to build a diversified portfolio – where your money is spread across many different investment types and places. The advantage of having a diversified portfolio is that it will help you offset the chance of everything you own performing poorly at the same time.
There’s a chance for higher returns
Although ethical investments are seeing their popularity rise, there’s this widespread belief that they can’t perform as well as other types of investments. Well, that’s absolutely not true. Evidence suggests that ethical investments can offer good returns, and since they’re not attached to any fixed interest rates, there’s even a chance for higher returns, just like more conventional investments. Let’s compare the FTSE All-Share, where about 600 UK companies are listed, with its ethical counterpart, the FTSE4Good, its ethical equivalent. Between September 2013 and April 2021, the FTSE All Shares returned 74.02%, against 78.37% for the FTSE4Good – if anything, this shows that ethical investing can outperform.4
Please note that like any form of investing, returns are not guaranteed, so even with ethical investments, there’s a risk you could get back less than you initially put in. And whilst historical performance does provide useful insights, it’s not a reliable indicator of future results.
It’s easy to invest ethically
Investing ethically can feel daunting, but it really doesn’t need to be. As mentioned above, if you don’t want to pick your own investments, there are digital investment platforms that will do the hard work for you. At Wealthify, we take care of the investing – all you need to do is choose the type of Plan you want, your risk level, and how much you’d like to invest – you can start with as little as £1! Then, our team of experts will build you an Ethical Plan with the right mix of funds, and they’ll keep an eye on your investments to ensure they remain on track with your goals and values.
References:
2: Morningstar
4: Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
