Everything you need to know about ethical investing

Looking to invest ethically? Here’s what you need to know.
pots growing little plants | Wealthify.com
Reading time: 15 mins

Investing can be so much more than just trying to make money! By investing ethically, you can give your money a chance to grow whilst driving positive change in society. But how does it work? How do you invest ethically? Here’s everything you need to know about ethical investing.

What is ethical investing?
Ethical investing is about seeking long-term growth, but without compromising on your principles. In other words, by investing ethically, you get to put your money both to work and to good use. But there is more than one way to invest in line with your values. In fact, ethical investing will mean different things to different people and institutions. Some people may want to avoid certain industries, like tobacco and weapons. Other people may look to invest in companies with excellent environmental policies. And there’ll also be ethical investors who will decide to do both.

This may come as a surprise, but ethical investing has been around for a while. Back in the 1800s, religious groups, including Methodists and Muslims, wanted to enjoy the benefits of investing but needed to follow strict guidelines and ethical practices. This is believed to be when ethical investing made its first appearance. Then in the 1960s, the concept of ethical investing made a comeback as American students protested when universities invested their fees against their ethics. Institutions, like Harvard and Yale, gave in and ended up blocking out investments that supported unethical matters, such as the war in Vietnam or the apartheid in South Africa.

Nowadays, ethical investing is becoming a fast-growing part of the investment world. In 2019, in the UK alone, there was an estimated £23.5 billion held in ethical investment funds – think of them as hampers full of sustainable investments1. Also, according to our own study, a third (32%) of non-investors would consider investing if they could do it ethically2. And the interest seems to be greater amongst young people and women. About 33% of women who aren’t currently investing would consider opening an ethical plan, compared to 29% male non-investors. Similarly, 45% of 18-34 year-olds said they would look into investing if they could go ethical, compared to 31 % of people aged between 35 and 54 and just 22% for people aged over 552.

How ethical is ethical investing?
Well, it all depends on how you define ‘ethical.’ According to the Cambridge Dictionary, the word ‘ethical’ relates to ‘beliefs about what is morally right and wrong.’ This definition looks pretty straightforward, but in practice, agreeing on what is morally acceptable can rather be difficult and sometimes even impossible. Take controversial topics, like immigration or war, and you’ll likely find people on both sides of the argument. Even on climate change, you’ll find some disagreements on the causes and the steps to take to reduce CO2 emissions. The term ‘ethical’ is subjective, and everybody will have their own definition of what they deem ethical.

So, since it’s impossible to reach a social consensus on what is right or wrong, there’s no way for ethical investing to meet everybody’s expectations and exclude everything people see as harmful to the environment and society. And as an investor, you should be prepared to make some concessions and understand that your ethical investment plan may not be perfectly aligned with your values, unless you’re going to take the time to research and choose individual investments yourself. However, with this in mind, it’s still a good idea to know where your money gets invested and look for an ethical plan that reflects most of your principles.

What is a good way to invest ethically?
If you’re looking to invest ethically, make sure you find the investment route that’s right for you and your objectives.

Individual investments vs ethical funds

When it comes to ethical investing, you can either pick individual investments based on their ethical value, or you can decide to buy sustainable funds – it’s completely up to you. If you decide to purchase investments one by one, you’ll need to do your research and examine the ethical profile of each investment – and realistically, this can be time-consuming, especially if you don’t have the knowledge or the expertise to do it yourself. With ethical funds, the hard work is done for you with professionals (also known as fund managers) selecting a wide range of investments based on the ethical policy of the fund.

Negative and positive screening

If you’re opting for ethical investment funds, it’s important to know how negative and positive screenings work as they’ll determine what is included in your plan.

Put simply, when a fund performs negative screenings, it simply means that it excludes certain activities because they’re considered harmful to the environment and society. At Wealthify, for instance, we use ethical funds that screen out what is commonly known as ‘sin stocks’ in the investment world – namely, tobacco, weapons, adult entertainment, and gambling. But it doesn’t stop there! Some funds will take the exclusion process a bit further and remove other activities, such as deforestation or animal testing. Ethical funds also come with different levels of tolerance. Some will remove unsustainable activities completely, but others may allow investments in organisations involved in harmful sectors if, and only if, they earn no more than 10% of their overall profits from the unethical activity in question. This is a deliberate level and the argument amongst fund managers is that if less than 10% of the company’s profits are earned from harmful activity, their involvement can be seen as negligible. At Wealthify, we aim to always be as close to 0% as possible, but the thresholds provide us with some wiggle room for the investment approach, allowing us to create value for our ethical investors without having to sacrifice the underlying ethics.

Whilst negative screening is about excluding harmful activities, positive screening is about investing in companies that are committed to doing good. But how does it work? Well, funds that carry out positive screenings will thoroughly examine what companies are doing. They’ll particularly focus on their policies and practices regarding the environment, society, and governance – all together, these areas form what we call ‘ESG’ and they allow fund managers to assess how ethical organisations are. Typically, fund managers will check things like how much waste a company produces, whether it gives back to local communities, and how transparent it is when reporting to the public. Each company will then be given an ESG score, and the ones with an excellent rating will be included in the fund. But it’s not just ‘best of breed’ companies that get selected! Companies that are working hard to improve their ethical standards will also be considered.

A large number of ethical funds will perform both negative and positive screenings, and this blending will often be referred to as Socially Responsible Investing, or SRI. This strategy aims to capture to best of both worlds and is believed to be a more ethically robust approach.

Active vs passive investing

Ethical funds can either be active or passive, and as an investor, it’s important to know the difference between the two. With actively managed funds, there’ll typically be a fund manager constantly monitoring what companies are doing to ensure they’re maintaining their high ethical standards or implementing the right policies to improve their ESG practices. Active ethical funds also give fund managers the power to use their shareholder voting rights to influence how organisations do business. On the other hand, passive ethical funds will use a fixed and rigid ESG score that looks at things in black and white and tends to ignore companies that are taking measures to do better. Also, with passive funds, it’s more difficult, almost impossible, to dig into a company’s credentials, consider each investment on its merits, and push for internal change. At Wealthify, we’re using actively managed funds because we believe it’s the best way to build portfolios that are truly ethical.

One thing to note is that active ethical funds tend to cost a bit more compared to other types of funds. This is because they involve a great amount of work, such as constant monitoring, thorough research, and due diligence. So, before you commit to anything, make sure you’re happy to pay a little bit more to do your bit for the future.

DIY vs robo-investing

If you want to invest in ethical funds, it could be worth looking into your options and the different investment routes available.

If you feel confident and have some investment knowledge, then you could select your own ethical funds by using a DIY platform. But remember, picking your own investment funds can be time-consuming as it requires research, data analysis, and constant monitoring on your part. So, if you’re too busy or just can’t be bothered to do it all on your own, you could choose to let experts do the hard work for you.

We live in exciting digital times where you can invest ethically with just a few taps. With robo-investing platforms, like Wealthify, opening an ethical plan has never been easier! All you need to do is choose how much you want to invest, the risk level that suits you, and switch the ethical toggle ‘on’. We’ll do the rest, from picking your ethical funds to managing your Plan on an ongoing basis. Our ethical Plans contain some of the best ethical funds in the industry and our investment team will engage with fund managers as well as their ESG teams to discuss corporate governance policies. We make sure to keep a close eye on the funds we select as well as their holdings. If a fund stops aligning with what we feel is appropriate for our ethical customers, we will remove it from our ‘buy list’.

Can ethical investing really make a difference?
Yes, ethical investing can drive positive change in society as it has the ability to push companies to change and adopt more ethical practices. If anything, the growing popularity of ethical investing suggests that there’s a real demand for corporate social responsibility. It’s no longer about offering customers the best products or services, companies now have to do their part for the environment and society. And as ethical investing continues to flourish, more and more businesses should understand that they have to actively find ways to increase their positive contribution to the environment and society or they risk missing out on financing opportunities if they continue to ignore such issues.

Obviously, things won’t change overnight, but we’re already seeing a number of cases where ethical investing has helped promote better ethical practices. Back 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 take more action to reduce their emissions3. This simple action is sending a clear signal to organisations that are responsible for damaging the environment – they must be more ethical if they want to thrive.

Does ethical investing mean lower performance?
It’s often assumed that ethical investing can undermine performance, but there’s plenty of evidence to show that investing ethically doesn’t necessarily mean lower returns. In fact, with ethical investing, you can combine your values with value. Take Wealthify’s 2019 performance for instance. Our Ethical Plans performed just as well, and in some cases better, than our Original Plans. But it’s not just our Plans! If you compare the performance of the FTSE All Shares, where over 600 UK companies are listed, with its ethical counterpart, the FTSE4Good, you’ll notice little difference. From January 2009 to October 2019, the FTSE All-Share returned 75.6% and the FTSE4Good delivered 75% - in monetary terms, it’s essentially a £30 difference on an investment of £5,0004.

How to invest ethically
Investing ethically is easy, but before you rush to the first ethical plan you see, there are things worth considering.

Know your principles

Knowing your own values and what you stand for will help you choose your ethical investments, so it could be a good idea ask yourself this simple question: ‘What are the types of activities I’d like to exclude from my ethical plan?’ List them all if that helps, but remember to keep an open mind about this. Realistically, it’s very difficult to find an investment product or service that will cater for all your requirements. If you want to go ethical, you’ll need to accept a certain level of flexibility and see where you’re happy to make a compromise.

Similarly, it’s also important to know what you want to invest in. What are the issues that matter the most to you? Whether it’s gender equality, working conditions, or climate change, make sure you consider your personal commitments before making any decision. Ultimately, the best ethical investment is an investment that reflects your beliefs and values as much as possible.

Choose the investment route you prefer

Once you know what you want to include in your ethical plan, you’ll need to choose the investing route that suits your needs. If you have time on your side and some investment knowledge, then it could be worth picking your own ethical investments. But if you’re busy or just don’t want to do it all by yourself, you could use a robo-investing platform, like Wealthify, to do the hard work on your behalf. The benefit of using a service like Wealthify is that you have a team of experts committed to doing the investing for you, and this includes things like monitoring the markets, picking ethical funds, and making adjustments to your plan when needed. All you need to do is sit back and enjoy the ride.

Consider diversifying your portfolio

Regardless of your risk appetite, whether you’re cautious or adventurous, it’s important to try and diversify your portfolio as it can help mitigate risk. By ‘diversify’, we mean spreading your money across investment types (e.g. shares, bonds, and property) and regions, so you’re less likely to lose everything. Now, many people think that ethical investing comes with less choice, but that’s absolutely not true! There are hundreds of ethical investments available on many different financial markets across the globe, allowing you to diversify and spread your investment risk.

Think about the long-term

When you invest ethically, it’s always a good idea to consider your timeframe. How long will you be investing for? As a rule of thumb, investing should be approached with a long-term vision – we’re talking years! Holding onto your ethical investments over the long term could help you ride out market bumps and give your money a better chance to grow. In fact, according to many studies, the longer you remain invested, the more likely you are to see positive returns.

Consider opening an ISA

If you want to invest ethically, consider doing it in a tax-efficient way. It’s not always well known, but it’s possible to invest responsibly with an Ethical Stocks and Shares ISA. With this type of investment plan, not only will you be doing your bit for the future, but you’ll also be adding value to your future, as you’ll get to keep more of your returns.

What if you already have an investment plan? Can you make it ethical?

Yes, you can and it’s very easy to do so. If you have a Wealthify Plan and want to go ethical, simply let us know and we’ll make your existing Plan ethical. And if you’re transferring an ISA or a pension, then why not make it ethical upon the transfer? If you have any questions or queries, feel free to contact our Customer Care team on 0800 802 1800, or via Live Chat.

 

References:

1: https://www.eirisfoundation.org/mission-and-money-aligned-charities-and-responsible-investment-2-2/

2. Research conducted by Opinium Research among an online panel of 2,004 nationally representative UK adults (aged 18+), between 14th to 17th September 2018. Results have been weighted to nationally representative criteria.

3: https://www.theguardian.com/environment/2020/jan/09/blackrock-joins-pressure-group-taking-on-biggest-polluters

4: Data from 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.

 

Share this article on:

Wealthify Customer Reviews