Three tips for ethical portfolio diversification

Recent events including the BP oil spill, Bangladeshi factory collapse, and other ongoing environmental concerns have all illustrated the effect that environmental, social, and governance (ESG) factors have on a company’s share price performance – and consequently investment portfolios.

Now, more than ever, it is making economic sense to therefore integrate ESG factors into your portfolio diversification, and consequently allow you returns that go beyond currencies.

The practice has changed the portfolios of many. Between 2010 and 2012 in the USA, sustainable and responsible investing (SRI) grew over 22% – to USD 3.74 trillion in managed assets. To put it another way, for every USD 9 professionally invested, USD 1 is SRI compliant. And by June 2011, investors in the UK had invested GBP 11.3 billion in the sector.

All diversification optimises a portfolio’s risk-return ratio, but many struggle to actualise their ESG leanings.

To this end, the following tips offer guidelines in how to ethically invest your money:

1. Negative screening

First, you should take a closer look at fund you are already investing in.

In accordance with SRI principles, many funds exclude investments related to guns, tobacco and alcohol – though your own social inclinations will inform whether you feel comfortable investing in a certain area.

Yet there are two levels to look at within a business, as seemingly innocuous investments can in fact by invested again into non-ethical funds, as happened with the Church of England’s unwitting investment into Wonga – a payday lender – something the Church had actively campaigned against.

2. Utilise socially responsible mutual funds

The 2010 Trends Report stated that socially responsible mutual funds increased to 250 in 2010, up from 173 in 2005.

With hundreds of SRI mutual funds, you therefore have a wide variety of choice when it comes to investing your cash in a socially responsible fund.

Yet the companies a particular fund decides to include and exclude may not match your own beliefs – meaning a thorough examination of the composition of funds before you invest is essential.

3. Investing in your community

If you want to keep the impact of your investments local, you may want to source investment opportunities within your community.

This could be a local startup with a business model you admire. In the UK for example, pubs in particular have captured the hearts of local investors, and have witnessed a surge of investments via crowd funding platforms – although this more go against your personal morals.

Moral standing

Throughout these points, reference has been made to an individual’s own moral standpoint. You may find after researching mutual funds for example you do not agree with investments that are included or alternatively excluded.

Once you begin to have a clearer understanding of where you want your investments to go, it should be easier to direct your investments appropriately. Alternatively, you can consult with an independent financial advisor, who will be able to help you choose the most suitable investments.

You can then enjoy the kinds of returns that go beyond the confines of your bank account.

Below is a list of some related articles, guides and insights that you may find of interest.

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