Ethical investments – also known as sustainable investments or socially responsible investments (SRI) – refers to any investments where the positive environmental, social, and ethical principles have been proven.
They have been a catalyst for change in today’s investment market, and the Ethical Investment Research Service stipulates that there was over £11 billion invested in the UK’s green and ethical retail funds in October 2011 – roughly three times more than the same month a decade ago.
Yet whilst ethical investment as a practise has therefore never been more popular, it is still only 2% of the total mainstream investment market.
How does it work?
There are three main approaches to investing ethically.
The first method is screening. This comes in two types: Firstly, negative screen occurs when you avoid businesses which do not adhere to ethical principles (for example, a tobacco manufacturer), and secondly positive screening looks for projects with a demonstrable, positive, social impact to invest in (i.e. renewable energy).
Preference or best-of-sector ethical investing looks at multiple companies in the same sphere, then assesses their social, environmental and ethical standing to determine the best option for investment.
The last approach is activism – where individuals invest in a company then actively attempt to change corporate behaviour. This takes many forms, such as positively addressing the company’s carbon foot-print to instigate changes, or cutting the cost of medicines for those in need – and is particularly useful in that it promotes social change.
How effective is it?
Whilst there is no evidence which states investing ethically will cost you investment returns, the question really lies in what you consider ethical – and how sure you are your investment really is.
Many people argue that there are too many factors to determine whether an investment is intrinsically “good,” and claim ethical investments are purely emotive marketing.
Problems include laxity pushing ethical developments, high charges, or secondary investments into non-ethical funds.
The vast majority of ethical funds also fail to disclose their holdings in full, and only list the top 10 at stake – making it much easier for them to abuse investor trust.
In the UK, research by Investors Chronicle magazine established that only one in ten funds claiming to be ethical would meet the criteria applied to ethical funds in countries like Belgium.
This lack of transparency was recently publicised in July when the Church of England found out is had indirectly invested £75,000 in payday lender Wonga – a company the Archbishop of Canterbury had actively campaigned against.
How to make sure you are ethically investing
The good news is that every investment fund serious about their ethical standing will have this information on display – whether on its website, Public Disclosure Statement, or annual report. Taking the time to apply further research to these companies can demonstrate whether they are truly an ethical investment option.
If you prefer, a regulated financial advisor can also help guide you through ethical investments, and suggest funds they have thoroughly screened and vetted – meaning you benefit from their extensive due diligence.