How Ethical and Sustainable Investing Can Shape Your Investment Choices
Ethical and sustainable investing is when you align your moral priorities with the investment choices you make. Here we discuss how to cut through the jargon, so that you can understand the differences between “ethical” and “sustainable” investments and how to invest ethically.
As a society we are focusing more on the impact of our lifestyles and the businesses we use on the environment, on equality, human rights and sustainability.
But it’s not just about reducing our meat consumption, shopping locally and reducing our carbon emissions, more people are also thinking about the companies we invest in – whether through our pensions or stocks and shares ISAs – and the impact they are having on the wider world.
Ethical investing is about aligning your investments with your ethical priorities. Rather than focusing solely on returns, ethical investors want to ensure their money is invested in companies with similar ethical standards to their own.
But investing for good doesn’t necessarily mean you will make less money.
In fact, many people want to invest more ethically because they believe it could mean they are financially better off in the long run.
Ethical investment jargon
There is an “alphabet soup” of terms and acronyms associated with ethical investment considerations, and many are used interchangeably.
According to a definition by the UK Sustainable Investment and Finance Association (UKSIF) the term ethical investing is often used for investments that are the most values driven. Ethical investors will often accept lower returns if it means they aren’t investing in companies who don’t share the same ethical priorities.
ESG is another term increasingly used. It refers to a set of criteria as set out by a company in regards to environmental, social and governance issues. There are no universal principles and each company will have its own framework for dealing with each area, some more robust than others.
Other terms or labels to look out for include responsible investing, impact investing, green investing or SRI (socially responsible investing).
Traditionally, ethical or sustainable investing used to be about screening out companies or sectors you didn’t agree with such as those involved in tobacco, gambling, alcohol, pornography, or weapons manufacturing. This is known as negative screening. Now there’s more of a move towards positive screening, where funds invest in companies that are doing something to solve a societal problem, be it a lack of diversity in the workplace or poor animal welfare.
The Investment Association says that 38% of all UK assets now integrate ESG factors into their investment decisions and 19% apply exclusion policies. But those strategies vary between investment managers.
But what actually is “ethical” or “sustainable”?
There is no one globally recognised objective scale of “ethical” or “sustainable.”
Not only are there multiple terms being used by different companies, but we all also have different views on what we consider to be ethical and have different priorities. For one investor human rights may be their biggest priority but for another climate change may be more important.
This means it is up to you to work out whether a company’s or investment fund’s principles align with yours.
Think about your own criteria. What do you care about the most: the climate crisis, the Black Lives Matter movement, or that a company pays all the tax it owes? Can you prioritise all those issues in one go, or do you have to think about which ones you’re prepared to overlook?
How can we invest ethically?
There are some golden rules to keep in mind when investing in stocks and shares, gen up on these with this guide before understanding how to start investing ethically.
There are a growing number of ethical tracker funds but these rely on ESG ratings. Many operate by screening out companies considered not to be ethical or sustainable, rather than investing for impact.
Active fund managers select stocks to go in funds. They use their judgement and research to decide which companies offer genuinely ethically or sustainable business practices. This means they are more expensive than passive funds.
Where can I look for ethical investment funds?
Investment platforms are effectively ‘fund supermarkets’ that let you select which funds you want to invest in from a huge range. Many will have their own ranking of ethical and sustainable funds to help you narrow your options.
Increasing demand for ethical investment means most asset managers will now have an ethical option. However, some might just be jumping on the bandwagon, so do ask a few questions before you invest. For example, what percentage of their assets under management are invested sustainably? Or what methodology do they use to ensure a fund is sustainable?
Keep in mind that investing is for the long term, and that even while investing ethically you should still make sure your portfolio is diversified.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more