Put your money where your values are
Ethical investing isn't just about making money - you may also help change the way companies behave.
Whether you’re concerned about climate change, the environment, workers’ rights, tobacco, gambling, gender equality or other issues, David Scull of South West financial experts Albert Goodman, explains how to put your money where your values are, with the lowdown on ethical investing.
What is ethical investing?
Essentially, ethical investing is a way to make money on the stock market without sacrificing your values and may even effect some change in the way companies behave.
Some form of investing on the basis of beliefs has been around since Islamic banking prohibited investments in alcohol, gambling and pork, back in the 7th century. In the US, 18th century Quakers restricted members from spending their time or money in the slave trade. More recently, the term ‘ethical’ investing was used for portfolios which excluded shares in firms perceived to be ‘bad’, such as fossil fuels or animal testing.
These days, people talk about socially responsible investing (SRI), sustainable investing and ESG (environmental, social and governance) investing. Whilst some companies are excluded, these portfolios tend to be much more proactive in engaging firms to change for the better, rather than just excluding them, a process which can create real change.
- ‘Environmental’ covers a range of aspects, but the focus is particularly on reducing carbon emissions, avoiding biodiversity loss and resource depletion.
- ‘Social’ refers to issues such as health and safety for workers and avoiding slavery and child labour.
- ‘Governance’ issues include executive pay, business ethics and transparent disclosure of information.
The term ‘responsible’ investing is helpful in being a more over-arching term for all of the above.
Does ethical investing mean settling for lower returns?
There is really no evidence to support this. This may have happened in the past because the pool of firms whose shares made up a portfolio was smaller. Many people now believe that more sustainable portfolios will do better in the future and evidence suggests consumers are moving away from firms not showing their ESG credentials.
Recently ESG portfolios have outperformed similar non-ESG ones (1), although this has been more to do with chance in the short term; those sectors which have done well in the last 12 months happen to be those which are more aligned with ESG principles.
It’s important to get a balanced portfolio though and, as with all investments, past performance is no guarantee of future returns; the value of your investment can fall as well as rise and is not guaranteed.
How do funds measure companies’ performance in ESG areas?
This is quite a complex area. A portfolio is typically made up of a very large number of equities (shares). Every company whose shares make up the portfolio are judged by ratings agencies on their ESG credentials. These can vary considerably, depending on the methodology applied, and what is reported by these companies. The growth in ESG investing has been huge in the last few months and years and continues to snowball (2). All the time, the methods of reporting and the robustness of the data are constantly being tested, standardised and improved.
Clearly this is not a perfect situation however, and whilst this kind of analysis is improving all the time, we should consider the alternative; to do nothing and wait for better reporting? ‘Greenwashing’ – where a company makes false claims about their credentials – can be a problem, but it should not stop us acting in the best way that we can, in order to try to make positive change and, as analysis improves and becomes more robust, things will continue to improve.
Can I choose to invest specifically in companies having a positive impact on the environment, improving gender diversity or workers’ rights in developing economies?
If you have specific objectives, either that you wish to include companies making a change or exclude those that you particularly object to, this can be done. You can buy shares in individual companies, buy into an investment fund/trust with a large number of companies or take the advice of a financial advisor to choose investment solution.
What are the key things to think about before pursuing an ethical investment strategy?
All of the same thoughts and considerations should apply as any other investment strategy: how long you plan to invest for, how much risk you wish to take, and why you are investing. These are key to all investment decisions. You might also want to ask yourself:
- Do you have specific issues you’re interested in or sectors you particularly want to avoid? Or are you aiming simply to be more responsible than not?
- Does the adviser you have chosen have the right knowledge and experience in ESG investing?
Finally, don’t lose sight of the fact you’re making a positive change. Global finance has a significant impact on firms all over the world, and investing in this way does make a difference to the world we all live in.
The information given here for information purposes only and does not constitute a recommendation. You should contact an appropriately qualified adviser for more information. The value of Investments is not guaranteed, and can go down as well as up.
NOTES: (1) MSCI World ESG versus MSCI World All Cap 01/01/2020 to 01/01/2021. (2) ESG Funds Under Management £28bn in 2015, £70.6bn in 2020, source: Morningstar to 31/12/2020