What is being ethical? We all have some idea of what it means to be ethical in our approach to others, to animals, to the environment. But what is ethical investing and can it work for you?
Ethical investment, often known as Socially Responsible Investment (SRI), can be confusing as there are so many shades of “green” funds available through unit trusts, open ended investment companies and investment trusts. Some funds are more environmentally friendly than others.
Companies also have different approaches to defining ethical. For example, British American Tobacco would not be classed as ethical by organisations such as Cancer Research. However, BAT has gone a long way to improve working conditions, with fairer wages and improving human rights issues in its overseas operations.
If you want to invest ethically, you should speak to us about what sort of investment would work for you and best suit your own principles.
As a conscientious investor, you can help companies take a more responsible attitude to human, animal and environmental rights. You can also help companies developing products to save the environment by choosing to invest in them.
Many people like to invest money in ethical funds for their children, as they want a better world for their children and grandchildren to grow up in.
Buying shares
Unless you are familiar with buying individual shares, this can be expensive and time-consuming. It may be better to ask your us to recommend an ethical fund where the manager can do the stock selection, management and research for you.
How Funds define ethical
Fund managers have different ideas about which companies would be the most socially responsible and ethical, while providing good returns. Managers can select their stocks in a variety of ways, which it would be helpful to look at when discussing with us which fund would best suit you.
One: Negative Criteria
Some funds actively screen out companies listed on the or other global stockmarkets that are involved in businesses such as tobacco production, deforestation, the arms trade and animal testing. This is known as negative criteria. Not all managers screen for the same things – a point you should discuss with us.
Two: Positive Criteria
Other funds prefer to use positive criteria such as looking for companies that produce things to help the environment, such as sustainable energy or recycling companies.
Three: Engagement
Other funds “engage” with companies by using the manager’s power as a shareholder to push for changes to the way it deals with human rights, the environment and corporate governance issues. This means managers will not screen against a good-performing company to the disadvantage of investors, but will try to influence the company for good.
As an example, British Petroleum has gone a long way to clean up its act, which makes it one of the most ethical companies in its sector and therefore a suitable investment form many SRI managers.
Myth: Ethical Funds Do Not Perform Well
Perhaps you have been put off ethical investing, believing that if a fund screens out all the tobacco, gambling and arms companies in its market, then it will underperform mainstream funds which invest in any company within its investment remit.
There can be some mileage in this argument. Oil and Tobacco stocks usually do well, especially when stockmarkets are not performing well. A fund screening out these companies could cut investors off from the stocks‘ performance.
However, engagement goes a long way to helping investors access the benefits of some of these top performers. By investing in the best of class/best of breed companies who are attempting to be more ethical, managers can make a difference while giving investors access to possible out-performance.
Moreover, ethical funds have performed largely in line with their peers over the medium term suggesting that many funds that have strict screening policies have not damaged their investors at all.
A further argument is that as the World Trade Organisation begins to crack down on companies exploiting people, animals or the environment, companies tainted by fines and negative press will start to underperform.
However, well-run companies with strong ethical principles will not be tarnished by future problems. As a result, they are more likely to be tomorrow’s performers, along with many start-up companies producing sustainable energy products that will shape the way we live in the future.