Is it time to consider ethical investing?

Investing ethically is by no means a new concept and its roots can be traced back hundreds of years.

Although initially a strategy used primarily by charities and religious groups, thousands of private investors in the UK now choose to invest their money in a socially responsible way and with this has grown a huge range of investment opportunities.

What is ethical investing?

Ethical investing is the practice of selecting investments based on ethical or moral principles. Ethical investing was the first step into what is now a vast responsible investment world. No longer is the focus purely a negative screening process that avoids certain industries (like alcohol, tobacco, adult content, guns, animal testing, fossil fuels or gambling), but instead investments geared towards progress on environmental, social and governance factors, and impact driven investments creating positive social or environmental change.

The rise in public awareness of the implications of human activities on the natural world could in part be attributed to Sir David Attenborough’s nature documentaries, the activities of Extinction Rebellion in London, the high profile of environmental activist Greta Thunberg and, more recently, the positive effect on pollution levels caused by the global lockdowns due to the spread of COVID-19.

Government policy has also become aligned to responsible investment and a focus on appropriate business practices. The United Nations published its own sustainable development goals in 2015, providing a framework of 17 specific areas to provide a 'to do list for people and the planet, and a blue print for success'.

Ethical investing was previously criticised for being at the expense of investment performance and if investors wished to make a positive impact, their return would need to be sacrificed to some degree. However, recent data does not support such claims.

The performance of responsible investments has actually been one of the key factors in its recent growth. The combination of strong investment returns, whilst at the same time investing in an ethical way benefiting society as a whole, provides a winning formula that is likely to go from strength to strength.

Types of ethical investing

This ever growing area of investment has brought with it a huge array of new approaches and terminology. Often these are used interchangeably, but there are key differences between each.

Investors looking to invest ethically will certainly come across the following:

• Environmental, Social and Governance (ESG) Integration
  ESG integration is concerned with the environmental, social and governance practices of companies that may have a substantial impact on its performance. These factors are considered, along with the usual financial examination, as part of the analysis of future performance.

• Socially Responsible Investing (SRI)
  SRI often uses ESG analysis, but also actively excludes or selects investments according to specific ethical guidelines. Unlike ESG integration which focuses on shaping valuations, SRI uses ESG factors to apply negative or positive screens on the investment universe. For example, only investing in companies that are outperforming their peer group on ESG metrics. For clients engaged in SRI, making a profit is still important, but must be balanced against principles. The goal for investors is to generate returns but in a way which is in line with their social conscience.

• Impact Investing
  Impact investing focusses on specific positive outcomes, meaning the investments need to have a measurable positive impact. The objective of the investment is to help a business to accomplish specific goals that are beneficial to society or the environment.

The boundaries between the different types of ethical investing can be blurred and are not always unanimously agreed upon. However, the distinct differences will affect how investors’ portfolios should be structured and which investments are suitable for meeting their goals.

With the ever increasing attention from governments and ethical mandates being set by individual investors, companies are understandably taking note of ESG factors. SRI targets and the ESG analysis all assist in the selection of better quality investments and this may feed through to better investment returns in the long-term.

Whilst some investment managers will focus purely on sustainable investment criteria, the effects noted above mean many mainstream investment fund analysts are using ESG integration criteria as part of their standard research analysis and company selection process. This is a trend which looks set to continue and will push sustainable investment further into the spotlight.

Actions to take

While ethical investing is not for everyone, if you do have strongly held views or a desire to make investments with a positive social impact then you should discuss these with your financial planning consultant to see how these can be accommodated within your overall portfolio and strategic asset allocation.

For more information on ethical investing or to discuss your individual circumstances please speak with your financial advisor.

Please note the information contained is correct as at the date of this article.