What is ethical investing and is it right for you?

Are you interested in the idea of using your money to change the world for the better via ethical investing? Since the pandemic and with climate change high on the news agenda more and more people are looking at the ethical aspects of their investments. It is something we are discussing more frequently with clients. Here are a few of the questions our clients have been asking:

What is ethical investing?

Ethical investing is an overall term for an approach to investing where we consider the values of the businesses we are investing in, as well as the financial return we may achieve. You may hear the term ESG – which stands for environmental, social and governance factors.

Environmental factors might include the business’ energy consumption or their policy on climate change. Social factors could include their track record on workers rights, equality and diversity or the gender pay gap. Governance issues are about the way the company is run, such as whether they are open and clear on their finances.

It is important to remember that there is no standard industry definition of an “ethical fund”. For this reason we do need to look behind the headlines and the marketing brochures to find out exactly what individual financial institutions mean when they talk about ethical funds.

How easy is it to invest in ethical funds?

Many financial institutions are realising that customers are interested in these issues and are responding to demand. Fund managers are asking more questions around the ethical standpoint of the companies they invest in. Many funds now include considering ESG factors as part of their decision-making process. Some institutions offer specific “Ethical or ESG funds.”

Will I get the same level of return as a standard fund?

There has been some suggestion that ethical funds may perform better than tradition funds  but as with all investing, ethical funds involve risk. The value of ESG funds could always go down as well as up and you could get back less than you put in.

Can I choose not to invest in particular companies where I disagree with their ethics?

Yes, you can often opt not to invest in companies or sectors that you disagree with, for example tobacco companies. This is known as divestment.

What are my other options for ethical investing?

Instead of ‘avoidance’ ethical investing you might want to consider what we would term ‘impact’ investing. Here you might invest into something you do not like (or into a fund that does this for you more specifically) with the aim of making improvements.

As an analogy, if you object to factory farming you might stop buying intensively raised chicken. This just means there will be less chickens, but no incentive to change. Conversely, if you buy a free range chicken you are positively encouraging a change to practices with how you spend.

Are there any other advantages to ethical investing?

There is a suggestion that companies that do well in ESG analysis tend to be overall better managed companies. And that companies and sectors that are developing new technologies, for example in response to climate change concerns, are likely to be growing which would make for a good investment.

How can I find out more about the ethics of the funds my pension is invested in?

You may already be invested in an ethical fund – or it may be very easy to make the change to one. This will depend on your pension provider. If you are interested in ensuring your funds are invested ethically, book an appointment by calling 01543 410512.