Ethical

What is ethical investing?

Ethical Investing aims to exclude profiting from activities that are considered harmful to society and the environment and to invest in organisations, companies and projects that are committed to operating in a way that is sustainable for the future.

This is typically done by filtering out harmful activities (negative screening) and proactively seeking to invest in companies that are committed to making a positive impact through their environmental, social and governance (ESG) practices (positive screening).

Negative screening: most ethical funds will screen the so-called ‘sin stocks’ such as tobacco, gambling, weapons and adult entertainment. Other issues screened might include animal testing, intensive farming, nuclear power, genetic engineering, deforestation, and poor human or labour rights. The activities screened and the screening criteria used, vary between fund providers.

Positive screening: aims to identify those companies demonstrating or showing commitment to achieve the highest standards of practise 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.

Wealthify’s ethical plans combine negative screening with proactive selection based on ESG scores, as well as qualitative, human consideration of a wide range of other factors that contribute to a commitment to future sustainability.

Ethical investing is one of a number of terms used to identify sustainable approaches to investing. Others include: Environmental, Social and Governance (ESG), Sustainable Investing and Impact Investing.

What are ESG, Sustainable and Impact investing?

Environmental, Social and Governance (ESG) aims to actively identify companies to invest in that demonstrate excellent environmental, social and governance practices. Fund managers might look at a wide range of factors: how much energy a company wastes; its overall impact on the environment; what it does to champion gender and race equality; whether it gives back to its communities; whether suppliers hold similar values; how transparent it is in reporting and whether its shareholders can vote on important issues. A complex scoring system is often used to determine a company’s ESG score, which determines whether it is a suitable investment. ESG fund providers constantly monitor and review the companies they invest in using these criteria to ensure standards remain in line with the aims of the fund.

Sustainable Investing: aims to generate positive social outcomes. It’s typically a blend of ethical investing (excluding companies involved in ‘harmful’ activities) and ESG investing (identifying companies that demonstrate good behaviour). This blend of negative and positive screening aims to capture the best of both worlds and, some argue, is a more ethically sound approach.

Impact Investing: aims to achieve specific benefits, whether social or environmental, as a result of the investment, as well as a positive return. It’s generally considered as a subset of sustainable investing, but does not necessarily aim to exclude activities which can cause harm. Impact investing seeks to make a positive impact by investing, for example, in enterprises that benefit the community, or in clean technology. It might also invest in companies involved in harmful activities if they can demonstrate they are taking action to significantly reduce their reliance on it to generate profit, or even switch to more sustainable activities.

Who manages your ethical funds?

We’re using best-in-class ethical fund providers: Edentree, Kames Capital, Legal & General, Liontrust, Royal London, UBS, Stewart Investors, iShares, and Vanguard. They have been selected for their exemplary quality of governance and ethical stance, and each employ rigorous and ongoing screening processes to ensure appropriate ethical credentials for the relevant funds.

All of the ethical fund providers we use are signatories of the Principles of Responsible Investing (PRI), the world’s leading proponent of responsible investing. The PRI is an independent body acting in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. More information: https://www.unpri.org/about-the-pri

Which ethical funds are you using?

We have a pool of up to 25 funds with which to build your ethical plan. The combination of funds we use depends on which investment style you choose and how we decide to balance your plan. The pool of funds will also change from time to time.

We’re using active (rather than passive) ethical funds in our plans, so-called because they are ‘actively’ managed to ensure that the investments within maintain the high ethical standards required. We think this is a robust way to manage our ethical investment plans, since actively managed ethical funds can take a far more qualitative approach: using a wider set of criteria and applying a common-sense approach to selecting sustainable investments. Passive funds on the other hand use a fixed ESG score to screen companies, offering little flexibility. Passively-managed ethical funds are also unable to exert shareholder pressure on individual companies in order to drive for positive change.

Current list of funds:

  1. Vanguard US Government Bonds
  2. HSBC UK Gilts
  3. Vanguard Euro Government Bonds hedged
  4. Lion Trust SF Corporate Bond
  5. Kames Ethical Corporate Bond
  6. Royal London SF Managed Income Trust
  7. EdenTree Short Dated Bond
  8. Royal London Ethical Bond
  9. EdenTree Sterling Bond
  10. UBS US Most Liquid Corporates
  11. Royal London SF Sustainable Leaders
  12. LionTrust SF Global Growth
  13. LionTrust SF European Growth
  14. Stewart Investors SF Asia Pacific ex Japan
  15. Stewart Investors SF Emerging Markets
  16. Ishares MSCI Japan SRI
  17. Kames Capital Ethical Equity Fund
  18. L&G UK Ethical Trust
  19. EdenTree International
  20. UBS Gender Equality

Please note: the funds and fund providers we use will be reviewed and may change from time to time, which may not immediately be reflected here.

What type of investments do your ethical plans contain?

Our ethical Plans are built using a combination of mutual funds and ETFs (exchange-traded funds). The funds contain multiple investments, selected by the fund providers according to their strict ethical screening processes.

The funds will typically include:

Shares (owning a piece of a company): excluding companies that profit from ‘sin sectors’ such as gambling, tobacco, adult entertainment and weapons among others. It will only include companies that demonstrate great environmental, social and governance standards, according to the fund providers’ and Wealthify’s strict criteria and ethical investing policies.

Bonds (an IOU from a government or company with some interest): both corporate and government bonds may be included and will be subject to the same strict screening criteria as shares.

Thematic investments: one or two funds will focus on investing themes such as gender equality (companies that strongly champion these issues) or green energy and will mostly be used in higher risk plans.

How does the ethical screening process work?

Fund providers will typically exercise two levels of screening:

Negative screening: aiming to exclude companies involved in activities that are at odds with ethical and socially responsible values. This typically means ‘sin stocks’ such as gambling, tobacco, adult entertainment and weapons, although most funds screen many more activities besides.

Positive screening: actively seeking and investing in companies that demonstrate excellent environmental, social and governance (ESG) practices. More about what this means can be found in What is ESG, sustainable and Impact investing? Fund providers will employ a scoring system to each company, rating it against a set of predefined criteria, such as energy efficiency, equality agenda and the quality of its corporate governance, looking at, for example, whether it has been fined in the past for regulatory violations. These all add up to an ESG rating, which determines whether a company should be considered for investment. Our ethical funds don’t just invest in companies with the highest ESG ratings. They will also identify and invest in ‘improving companies’ – i.e. those that show significant commitment to improving their environmental, social and governance practices. An example might be a coal company that is investing a significant part of its profits in the research and development of green energy.

How do you ensure that the funds remain ethical?

Ethical fund managers will regularly search for new companies to invest in, whilst also monitoring the activities and practises of the companies already in the fund, to ensure expected standards are maintained.

As shareholders, funds can even use their influence and voting power to steer the organisation towards ever higher ethical standards, attending AGMs and lobbying the board of directors. Where the fund holds a significant shareholding (e.g. 10% or more) they may get an audience with the board of directors where they can highlight issues and help influence the strategic direction of the organisation. Ethical fund providers sometimes join forces to wield more influence over the board, if their own shareholding is too small.

If a company consistently allows its standards, and therefore its ESG rating, to slip, fund managers are able to withdraw investors’ money and remove the company from the fund.

All ethical fund providers have built a level of independent verification into their processes, usually carried out by an autonomous and impartial organisation, to ensure that no bias creeps into the fund’s screening and monitoring process.

Wealthify also has its own code of practice, set out in our ethical investing policy. Our investment team will regularly monitor the ethical funds using specialist ESG company assessments conducted by a third party, to ensure that their standards of practice are not falling below what is expected.

What do your ethical funds exclude?

Each fund provider will negatively screen (i.e. exclude) companies involved in certain sectors and activities. Typically, these will be ‘sin sectors’ such as gambling, tobacco, adult entertainment and weapons. The full list of sectors considered can be much wider.

The exclusion criteria also vary between providers: some funds will completely exclude a company profiting from harmful activities (e.g. tobacco) whilst others may invest in the company, provided it earns no more than 10% of its overall profits from the activity in question. This 10% tolerance allows a small degree of flexibility to account for instances where a company isn’t directly involved, but could be exposed to a harmful activity via, for example, a parent company or supplier. Fund managers argue that earnings of less than 10% demonstrates there’s effectively no significant involvement in that activity and an investment in the company is justifiable.

A 10% tolerance is applied to the screening of some activities by the fund providers we use. Therefore, we can never guarantee that our plans will not contain some degree of exposure to any of the harmful activities listed.

Our ethical funds aim to exclude the following, subject to an up to 10% tolerance:

Weapons; gambling; animal testing; deforestation; nuclear power; climate change; oppressive regimes; adult entertainment; tobacco; excessive political donations; human rights issues; intensive farming; unfair labour practises; genetic engineering.

Will performance be lower with an ethical portfolio?

Returns are not guaranteed with any form of investing and you could get back less than you put in.

With all types of investing, cost affects your performance, as the more you pay in fees and charges, the fewer returns you get to keep. The overall cost of investing in an ethical plan is higher than that of a standard plan and therefore, investing in an ethical plan may affect performance and your returns could be lower than a standard investment plan with an equivalent investment style. Ethical funds aim to avoid investing in certain sectors, like tobacco or gambling, which could also affect your plan performance.

You can get some idea of how ethical investments perform against their standard counterparts by comparing market indices like the FTSE for Good against the FTSE All Share. Of course, past performance is not a reliable indicator of future performance.

Why are your ethical plans more expensive?

We use a blend of active and passive ethical funds in our plans which are a little more expensive (average 0.54% per year) than the funds we use in standard Plans (average 0.21% per year). The extra cost reflects the fact that active funds are proactively and comprehensively managed to ensure the investments retain appropriate ethical standards. We think this is a robust way to manage our ethical investment plans, as it allows for a qualitative and common-sense approach to selecting and monitoring sustainable investments.

However, our annual management fee for ethical plans is the same as standard plans and transaction costs (also known as ‘spread costs’) will typically be lower, at an average 0.03% per year.

How much will I pay for an ethical plan?

Based on a £10k investment

Ethical plans

 

 

Cautious

Tentative

Confident

Ambitious

Adventurous

Average

Fund Charges

0.42%

0.46%

0.52%

0.6%

0.69%

0.54%

Spread Costs

0.003%

0.02%

0.03%

0.04%

0.05%

0.03%

Total cost incl. annual management Fee (0.7%)

1.12%

1.18%

1.25%

1.34%

1.44%

1.27%

Costs are for illustrative purposes only.

A customer investing £10,000 into a medium risk (confident) ethical plan will pay:

  • 0.7% annual management fee
  • 0.52% fund charge
  • 0.03% spread cost

The total illustrative cost of investing would therefore be 1.25% per year, based on the value of your investment.

Are the ethical plans less diverse?

We do have fewer types of investments at our disposal to create ethical plans, but we still use the main two types of investment – shares and bonds – as well as some thematic investments, for a bit of variety.  Your plan will also hold a small amount of cash, which is common practise to enable our team to be flexible in buying investments on your behalf.

Our investment team has built a bespoke optimization process that acts to, as closely as possible, match the allocation of investments in our ethical plans to our standard plans. The tool looks at the underlying investments by region and asset type and makes sure they’re aligned as closely as possible to our standard models.

How do I set up an ethical Plan?

Just create your Plan in the normal way using our simple sliders, then toggle the ethical switch ‘on’. Your projected value – shown in a lovely shade of ethical green – will tell you how much your investments could potentially be worth after all fees and charges have been taken.

Can I make my existing Wealthify Plan ethical?

If you already invest with us, you’ll need to get in touch with our customer support team who can assist you further. Call 0800 802 1800, or send us a secure message via your Wealthify account by clicking the 'Messages' link.