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How does ethical investment screening work?

When it comes to investing ethically, “screening” is a word that’s thrown around a lot, but what does it mean and how is it done?
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Whether you choose to invest ethically because of your moral values or simply because you think it may offer you greater returns, ethical screening is something that will play a big role in what your money is invested in. But what exactly is ethical screening and how is it done? Keep reading to find out.

What is ethical screening?

In the simplest terms, think of ethical screening as being a bit like a bouncer. Before any investment is allowed to enter your portfolio, they’ll need to get past the bouncer – and that bouncer has a very strict guest list and is really focused on making sure that no unwanted riff raff gets in.

But of course, in reality there’s far more to it than just having one person standing on the door. Sure, there are certain things that won’t be allowed in as a general rule, just like how a nightclub wouldn’t let you in if you’re wearing flip flops! However, there are several steps to take into account when it comes to ethical investment screening.

So, what are they?

Well, the first one is understanding exactly what it is that you don’t want to be invested in. For example, most ethical investing aims to exclude certain industries automatically as they are considered ‘sin stocks’. This is because they’re potentially harmful to people, society, and/or the planet.

As an example, tobacco companies could be considered a ‘sin stock’ in some investment portfolios. At Wealthify, this is one of industries that we aim to exclude from our Ethical Plans.

What types of screening are there?

There are lots of different ways that you can ‘screen’ your investments, and the example listed above is known as ‘negative screening’ which removes harmful activities. However, you can also apply ‘positive’ screening to your ethical investments.

Here’s a very quick summary of how these two ethical screening methods work:

  • Negative screening - this is where you simply avoid harmful investments by removing any ‘sin sectors’ such as tobacco, gambling, weapons and adult entertainment. Other industries may also be removed in negative screening, including animal testing, intensive farming, fossil fuels, genetic engineering, deforestation, and any others that encourage poor human or labour rights.
  • Positive screening – this is a method that looks to identify companies that demonstrate or are showing commitment to achieving the highest standards of practice in the areas of environmental impact, social justice, and corporate ethics. Only organisations that score highly across these three areas will be eligible to receive investors’ money.

When investing ethically, you don’t need to apply an either-or approach as positive and negative screening methods work well together, and Wealthify does exactly this when it comes to the investments that go into our Ethical Plans. When reviewing companies, we combine negative screening with a proactive selection process based on their ESG scores, as well as qualitative, human considerations of a wide range of other factors that contribute to ensuring future sustainability.

How does Wealthify do ethical screening?

At Wealthify, we aim to strike a balance when it comes to our Ethical Plans. We use both passive and active investing approaches to help our customers achieve their long-term goals, while contributing to positive environmental, social, and governance (ESG) outcomes.

To do this, we aim to exclude 4 core industries that we consider to be ‘sin sectors. These are:

  • Weapons manufacturing
  • Gambling
  • Tobacco
  • Adult entertainment

Passive vs Active investing

‘Passive’ investing allows our Investment Team to build you a Plan that’s invested across various different investment types worldwide whilst aiming to keep costs as low as possible. It will let us track a specific market index, such as the FTSE 100 (which is made up of the largest companies listed on the London Stock Exchange) using a ‘set it and forget it’ approach.

‘Active’ investing, on the other end of the coin, is a more hands on approach involving dedicated research teams whose aim is to achieve the core principles of ethical investing. When they take an active investing approach, fund managers will choose the investments they think will do well and potentially outperform the market.

This can be slightly more expensive because of the work involved, which is why it can cost a little bit more to invest ethically.

In addition to this, our team closely review all the companies in each fund to make sure that they aren’t in our exclusion list and to understand more about these individual companies and how they operate.

There are also a number of sectors that we don’t strictly exclude outright but work hard to keep at a minimum in our Ethical Plans. These are sectors that comprise of things such as fossil fuels, metals, alcohol, chemicals, and airlines.

One reason for this is because our ethical fund managers will consider organisations that are willing to change their practices and are able to demonstrate that they’re actively working towards being more ethical. So, although they may not be quite there yet in terms of sustainability (as an example), they may well be in the near future.

This allows us to continue to push for change and ensure that more and more businesses are striving to have a positive impact on the world.

How easy is it to invest ethically?

With Wealthify, it’s as simple as flicking a switch. If you’re a new customer, all you’ll need to do is choose an Ethical Plan when you sign up.

For existing customers, you could create a brand-new Ethical Plan, or you can easily change your existing Plan to an Ethical one. Simply, select the Plan you want to change in your dashboard, and then go to ‘Change My Investment Theme’. It’s that simple.

We’ll do all the hard work for you, making sure that your investments align with your values and that there’s nothing in your Plans that you wouldn’t want to be there. All Wealthify accounts can be ethical – whether you have a Junior ISA, Stocks and Shares ISA, General Investment Account or pension – so it’s easy to invest towards a better future with Wealthify.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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