What is an ethical investment?

What is an ethical investment?

An ethical/green/SRI/sustainable investment is one which not only considers the financial returns of a company but also their ethical/SRI credentials.

Such investments can either positively or negatively screen companies (or both).

Positive screening

Positive Screening is where a fund manager will opt to invest in a company based upon (amongst other things) the Company’s positive social or environmental impact. For example, Companies involved in helping to promote sustainability.

Negative screening

Negative screening looks a certain sector such as tobacco production and will avoid this type of company. Even considering their potential financial returns, such companies will be excluded from an ethical portfolio based purely on the ethics.

With negative screening, you can therefore avoid whole areas of the investment market. For instance alcohol, gambling, energy companies, oil companies and so on.

How does it work?

With positive screening, fund managers will go through a much more vigorous process of selecting which companies they invest into. They will also often engage more with the companies to understand what they are doing and potentially encourage them to improve their behaviour.

With negative screening companies will be excluded based purely upon the sector they operate within.

Does this impact investment returns?

 There has been a long-held belief that by investing responsibly will mean sacrificing investment returns. The table below (taken from MoneyFacts July 2019) shows that over the shorter term (up to 10 years), this isn’t necessarily the case.

Over 15 years, the returns from “non-ethical funds” have been superior. Although it could be argued that over 10 years ago ethical investing was a more niche market with fewer funds and less sophisticated procedures than there is now.

It is also important to note that short term investment returns between ethical and non-ethical funds can vary massively. For example with good/bad performance in oil – an area traditionally excluded from ethical investments.

Taken from MoneyFacts July 2019

How do you know where ethical funds are investing?

When looking at and assessing ethical investments, it is important to understand whether the fund is operating a positive or negative screening approach. It is also important to look at whether the approach of the fund manager is aligned to your preferences. For example, some may negatively screen tobacco but not gambling. Sometimes, it is possible to complete an ethical questionnaire which a fund manager can then use to create a bespoke portfolio aligned to your values. If this is not possible, it is wise to get under the bonnet and do some digging. If you would like assistance with this, do get in touch.

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