How are ethical investments selected?

Wondering how ethical investments are selected? Here’s how it’s done!
How are ethical investments selected?
Reading time: 5 mins

In 2019, 7% of new investors in the UK chose ethical investments, compared to only 2% in 20091. And that’s not all! When asking non-investors whether they would enter the investment world if they could go ethical, almost a third (32%) said they would consider it2. Needless to say, ethical investing is on the rise! But despite this growing popularity, many things about it remain a mystery, including the investment selection. Here’s a quick guide to help you understand how ethical plans are built.

 

DIY investing vs robo investing
The way ethical investments are selected mainly depends on the way you’re choosing to invest. If you decide to do it all by yourself, then it’ll be your responsibility to pick your investments and ensure they meet your ethical values. Doing the investing on your own, via a DIY platform, is a great way to be in control of what gets included in your portfolio. However, this method requires some financial knowledge and involves market analysis. So, if you’re too busy or don’t feel comfortable enough to build your own ethical plan, don’t worry, there are other ways to get there.

In today’s digital age, it’s possible to become an investor in just a few clicks and without any hassle. With robo investing platforms, like Wealthify, you simply need to choose how much to invest and the risk level that suits you. We’ll do the hard work for you. Not only will we pick your investments, we’ll also manage your ethical plan on an ongoing basis. And although, we’re known as ‘robo investing’ your money is actually looked after humans – we’ve checked!

But what do we put in your ethical plan, you ask? Well, to start with, we invest in ethical funds – which are hampers full of sustainable investments. Most of the funds we use aim to exclude activities seen as harmful to the environment and society, including tobacco, gambling, weaponry, and adult entertainment. Other funds will take the negative screening further and exclude a larger range of harmful sectors, such as animal testing and deforestation.

We also use funds that pro-actively seek companies committed to doing good. Typically, fund managers will look at companies’ practices and measure how ethical they are by looking at the three key ESG pillars: environment, society, and governance. In other words, fund managers will check things like how much waste a company produces, what it does to champion gender and race equality, and how transparent it is when reporting to the public. They’ll then give each company an ESG score, and depending on the outcome, they’ll decide whether the company deserves to be included in the fund. The higher the ESG rating is, the more likely a company is to join the fund. But it doesn’t stop there. Companies which are working hard towards improving their practices and standards could also be considered by fund managers.

 

Passive investing vs active investing
When it comes to selecting companies that do good, there are two ways to go about it. One way is to use a fixed ESG scoring system – this is what passive ethical funds do. Whilst these funds are cheap and select ‘best-of-breed’ companies, they may fail to recognise the efforts and merits of other organisations trying to make their practices more ethical and your investment plan could be missing out on sustainable opportunities. An example of this would be a fast food chain introducing healthier meals and reducing the amount of red meat they use in their recipes.

But that’s not the only way to pick ethical investments. You could also use active ethical funds where you get someone to conduct thorough research and due diligence to ensure the sustainability of every investment included in the fund. Since there’s a bit more involvement, active funds tend to be a bit more expensive than their passive counterparts. But if you want to make a real difference, actively managed funds could be a good option as fund managers will use their shareholder voting power to try and influence the overall direction and policies of companies they invest in. This is not something you would get with passive ethical funds. At Wealthify, we use actively managed funds because we believe it’s the only way to build plans that are truly ethical.

References:

1: https://www.statista.com/statistics/1090714/share-of-people-who-chose-sustainable-investment-uk/

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.

 

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.

 

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