Over the last couple of decades ethical and responsible living has become increasingly popular. There are many things you can do to help: recycle or reuse food packaging, reduce the amount of plastic you use, purchase Fairtrade products and where possible choose ethical brands and purchases. What about when it comes to investments? If your aim is long-term growth, perhaps ethical investing could be the answer. Here’s what you need to know…
It’s about helping make a difference
Ethical investing is about seeking long-term financial growth while investing in companies with high environmental, social, and governance standards. Opting for an ethical portfolio means your money is put into investment funds that aim to exclude companies profiting from harmful activities, like tobacco and adult entertainment and focus on companies which are committed to making a positive impact (and profit) through their practices.
It’s investing with a conscience
Ethical funds typically perform negative screenings to remove ‘bad things’ from your portfolio. Exclusion policies will vary between funds, but usually this means companies undertaking activities considered harmful. In the case of the funds Wealthify uses, this includes the so-called “sin stocks”: tobacco, weapons, gambling, and adult entertainment.
Most ethical funds carry out a wider range of negative screenings, considering firms’ involvement in activities as diverse as deforestation, animal testing, intensive farming, nuclear power, and genetic engineering and organisations operating under oppressive regimes or in countries with low standards of human or labour rights.
It’s not just about avoiding certain activities. Ethical funds carry out positive screenings, involving seeking out and picking companies that demonstrate excellent environmental, social and governance (ESG) practices or work on improving them. Selecting such companies requires fund managers to look at many things, such as the amount of energy wasted by an organisation, the proportion of women and minorities employed, transparency standards, and relations with stakeholders as well as shareholders.
It’s pushing for change
Ethical funds don’t invest in companies and just sit there. They tend to play an active part in driving continued positive change in their investment ESG. Funds managers do continuous screening and spend significant amounts of time monitoring companies’ ESG activities and constantly reassess whether they remain suitable to be included in their funds. Often an additional level of monitoring is added by an impartial third party to avoid biases creeping in. Our Ethical Plans use a mix of passive and active funds because we think that employing a rigorous and ongoing screening process is the best way to make sure that our ethical standards are maintained.
Fund managers may even get involved in influencing ESG policies of companies in which they invest. Using shareholder voting power, they can compel organisations to work towards higher ethical standards. If a fund holds a significant company shareholding, they might even have access to the board of directors, where they can bring up issues and influence the overall strategic direction. Ultimately if the ESG standards of a company fall below the strict criteria of a fund, managers will withdraw the investment and the organisation will be removed from the ethical fund.
The additional work required to monitor companies’ ethical standards and the fact this requires active management means that ethical fund charges tend to be a little higher than standard investment funds.
You can combine your values with value
Some investors believe ethical investments see lower returns than standard investments, due to the kind of activities that ethical plans exclude, which tend to be very profitable. However, evidence1 suggest that stocks of companies that are more ethically responsible can perform equally well over the longer term, since their stock prices see less negative impact from scandals and industry fines.
It’s also assumed that Ethical Investment Plans are less well-balanced due to a smaller asset pool to pick from. Whilst the asset allocations will differ, your money is still invested in multiple funds containing a wide range of shares, bonds and alternatives covering the same regions worldwide as a standard plan. To help things further, Wealthify’s investment team created a bespoke tool to match our Ethical Plans as closely as possible to the combination of assets and regions their equivalent risk-level in a standard investment plan.
One thing likely to affect ethical plan performance is the higher cost of investing associated with ethical plans. Charges for actively-managed ethical funds tend to be higher on average than standard fund charges (our standard fund charge is 0.21%), which will weigh on overall returns slightly more compared to a standard investment plan.
Ethical stock market indices, such as the FTSE4Good, allow you to compare the performance of ethical plans to classic markets like the FTSE All-Share. However, since past performance is not an indicator of future performance it’s impossible to know for sure how ethical will fare against its mainstream counterpart in the future. In the end, it’s down to you to make up your own mind up about which way to invest and that’s a choice we’re happy to help you with.
1: Moneyfacts, Aug. 2017 - https://moneyfacts.co.uk/news/investments/ethical-funds-perform-strongly-once-again/
When the first UK ethical fund was launched in 1984, most investors looked at it with disdain and scepticism. Over 30 years later, ethical investing has become increasingly popular and is now a well-established mainstream route. According to The Ethical Investment Research Service (EIRIS), more than £162 billion is invested in ethical funds in the UK alone. Another study found that 75%3 of individual investors had an interest in ethical portfolios. More encouraging, people aged under 45 are more likely to put their money in ethical funds, suggesting the future is sustainable.
3: Boring Money Insights, DIY Digital Wealth and Robo – July 2018
Figures in this blog are based on past performance and 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.
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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.