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How can I invest my money ethically?
When investing money, you might be considering ethical investment, environmental or green investment or simply investment in companies that align with your own values. It’s not something that everyone will prioritise, but with an ever-growing need for all of us to ‘do our bit’ it can be a good option, especially if you want to invest responsibly and make some sort of positive difference – without suffering financially. But what is ethical investing and does it work?
What is ethical investing?
There’s no hard and fast definition of ethical investing, as ethics are subjective, and it can mean different things to different people. However, it’s essentially an investment that’s motivated by morals or principles. Deciding on ethical companies to invest in will depend on what causes you want to prioritise.
One approach is to think about what you’d like to avoid investing in – this is known as negative screening – another is to look at supporting companies who are doing something you believe to be good – positive impact investing. For example, consider an oil company that’s looking to invest in renewable energy. However, it’s worth remembering that it’s tricky for investment services to keep everybody happy – if they were to exclude everything that could be morally objectionable, it would really restrict the investment options. And what is morally objectionable for one person, may not be for another.
You might have heard of terms like ESG investing before. This refers to an investment approach where fund managers invest in companies with a particular focus on the Environment, Social inequality, and Governance hence the term ESG. Similar terms for the same practice include green, sustainable, and responsible investing – but they’re all broadly similar.
Some ethical investment strategies include positive-impact investments only, while others simply exclude negative-impact investments. Meanwhile, there are some investment strategies that use both. Some advisers or funds might, for example, exclude tobacco and gambling companies from their investments and refer to the strategy as ethical or sustainable, even though there aren’t actually any overtly ethical companies in the portfolio.
How to ethically invest
Once you’ve decided what you’d like to avoid, you can choose the right investing route for your goals. One option could be to choose your own ethical companies to invest in, but this isn’t straightforward – it involves a lot of research about the various companies on the stock market and what they do in terms of ethical behaviour.
Another option is to invest in ethical funds. Think of it like baskets of sustainable investments, like bonds and shares, that give you the chance to invest in a range of ethical companies. When it comes to ethical funds, there are a few things to look out for to increase your chances of getting a good return.
Ensure that the fund you’re looking at has a clear and coherent investment strategy and research how this type of investing is viewed by the parent group. It also helps to double-check the length of time the main fund manager has been in their post for too, especially if you are looking at past performance.
Why would someone ethically invest?
Ethical investment can be viewed as a win-win. You’re aiming to make a profit while also trying to have a positive impact on the world – you hope to get the financial return you’re after but keep your principles too.
Someone might ethically invest for religious reasons. If they belong to a religion that prohibits gambling, for example, they may want to stay away from gambling-related companies. Likewise, if someone is a vegetarian or vegan for ethical reasons, they might want to avoid investing in anything involving harm to animals, like animal testing.
Ethical investing isn’t something that’s right for everyone, but if somebody wants to combine their finances with their morals, values and principles, it can be a good option.
Benefits of ethical investing
There are a few different benefits of ethical investing, the main one being that you get to invest in companies that share your values. You can benefit both financially and from an emotional and mental perspective, too.
Increasingly, consumers in general are making purchases that reflect their ethics and morals, so more ethical and socially-responsible companies could see increased profits over time – consequently, ethical companies could be worthwhile investments.
Since ethical investment is on the rise, more and more investors are focusing their finances on ethical companies. As a result, businesses are looking to improve their own ethical practices to keep up their funding. This will kickstart a trend towards businesses becoming more ethical and sustainable.
Does ethical investing work?
You’d be forgiven for assuming that ethical investing doesn’t work as well as regular investing, but that’s not necessarily true. There’s no evidence to suggest that ethical funds don’t perform as well and whilst past performance is not a future indicator of performance, we have actually seen a number of ethical funds produce strong returns in recent times – you don’t need to sacrifice growth and financial gain if you decide to get into ethical investment.
Many ethical companies – i.e., companies that are mindful of the environment and treat their employees well – will be run better and less likely to find themselves involved in any scandals or controversies, which may produce a financial benefit in the long run.
That said, there are some potential drawbacks to ethical investment. Researching companies to make sure their values match yours can potentially be rather time-consuming – particularly as some companies might not actually be as ethically or sustainable as they seem on the surface. The fees involved in ethical investing can often be higher too (because of the extra research needed) which cuts into your portfolio’s profits.
Something people might do as an alternative to purely ethical investing is to invest as normal but donate some of their profits to causes that align with their values and morals. Another, alternative is looking at ESG labelled investments which will give you some reassurance that your money is being invested with well-run companies that are doing good by their staff, the environment and socially. It’s a huge ever-growing market and we believe will only continue to grow in popularity as more of us get on board with investing our money for good.
If you’re still unsure, or perhaps considering ethical investment or ESG Investing, why not speak to an adviser? You can get in touch with The Private Office for a free initial consultation today.
Please note: Investment returns are not guaranteed, and you may get back less than originally invested. Past performance is not a guide to future returns.