Women, welcome to the year of ethical investing, when money making will have a greater conscience than ever before.
Over the past two years, we have seen an enormous increase in demand for environmental, social and governance (ESG) strategies, as people want to balance their desire to make money with their moral conscience.
What is ethical investment?
Ethical investment funds only put money into non-controversial, responsible industries. They exclude stocks from sectors such as alcohol, animal testing, armament, oil and tobacco.
A company’s ethical credentials are often determined by their ESG (environmental, social and governance) factors. In fact, there are many household names whose credentials in these areas mean they qualify as an ethical investment, including AstraZenica, Legal & General, Lloyds Bank and Vodafone.
Traditionally, ethical investing has been seen as only of interest to ‘hippies’ and ‘tree huggers’, but they are now attracting increasing mainstream attention. This is helping to dispel the myth that ethical funds make less money.
What has prompted the rise in demand for ethical investment?
Over the past couple of years, we have seen a number of major corporations caught up in scandals or corporate blunders – from Volkswagen’s diesel emission cheating to Tesco’s £326m accounting shortfall.
This has led to a backlash from investors, who want to ensure their money goes into a business that they can trust ethically, as well as financially.
How do I get started with sustainable and responsible investing?
There are a number of off-the-shelf investment portfolios available with an ethical angle. Many of these use a technique called ‘negative screening’ in which they avoid companies with harmful products or practices, such as gambling or tobacco production.
Others will positively seek companies doing good for the world, like renewable energy organisations or retail companies that practice minimum wage payments and sustainable sourcing.
Some may decide on a best of breed approach, which only looks to businesses setting standards within a divisive industry – like an oil company that is taking steps to limiting environmental damage.
Alternatively, you can speak to a professional investment advisor or wealth manager, who will put together a portfolio of companies that reflect your individual values.
A good adviser will talk you through each of their selections, to explain not just why their ethics match your views, but how each company will generate return on your investment.
How can I ensure my ethical investment makes money?
Although the idea that ethical funds perform poorly compared to mainstream investment portfolios is a myth, always be careful to understand the credentials of the company in which you are investing.
On a moral level, you need to be aware of whether the company you are considering owned by a larger corporation. For instance, L’Oreal is part of Nestle, which has been labelled as unethical by many people for promoting the idea that baby formula is better for infants than breast milk.
Equally, you need to think about the financial performance of your chosen funds. For example, ethical portfolios tend to be made up of mid and small cap companies, which can be more susceptible to fluctuation during times of market volatility. There are also certain sectors that are more vulnerable to market changes; a recent downturn in the oil sector has had a significant impact on many investments.
I want to explore ethical investment – how do I get started?
When you need help with your investments, we can help you develop a portfolio right for you.
The value of investments can go down as well as up and you may not get back the amount invested.