Today’s zeitgeist seems to be pushing ethics and sustainability to the forefront of business and industry. Typically a product or service is centered around improving the life of the end user, although now more than ever the cost to others along the supply chain - as well as environmental footprint - is an important business consideration.
Conversely, consumers are making it their business to understand where their products come from and which types of organisation they invest their money into.
As ethical and sustainable businesses grow, so do their investment counterparts. A rise in the global consciousness and concern for the welfare of people and the planet means that more people are choosing ‘green’ investments.
Green, or ethical investment gives individuals the power to allocate capital toward companies that are in line with their personal views - whether that be based on environmental, religious or political concerns. And more of us want to align our investments with our ethical preferences.
Definition matters
A robust definition is important when it comes to estimating the value and reach of ethical investments. The US-based Forum for Sustainable and Responsible Investment (USSIF) sets out a broad definition of Sustainable and Responsible Investment (SRI) as:
“A process of identifying and investing in companies that meets certain baseline standards or criteria of Corporate Social Responsibility.”
There is a great deal of disagreement among investors, companies, NGOs and academics on what exactly constitutes ‘ethical investment’, or ‘socially responsible investment’, as it is more commonly known in the US.
Essentially, investing ethically balances the regard for morality of a firm's activities and the regard for return on investment. Ethical investors seek to invest - usually through mutual funds or unit trusts - in firms which make a positive contribution to the quality of both the environment and of life. Usually those funds go towards sustainable investment or SRI, following an investment process that incorporates environmental and social factors, in addition to the objective of achieving a decent financial return.
So why go ethical?
There are in fact some reasons why you may not choose an ethical investment. For instance, it’s argued that ethical funds can be hampered when competing against those funds which are free to invest in any company. Most ethical fund managers shun oil, mining and commodities, which are hot sectors. However, oil and commodity prices won't rise forever, and ethical funds can prosper through the likes of renewable energy investments such as solar panel and wind power manufacturers, for example.
Since the global recession investors have been concerned primarily with cash preservation and income paying stocks. While many would like to think of themselves as ethical investors, there’s a widespread misconception that supporting green industries isn’t stable. But this isn’t necessarily the case nowadays - as we saw with the renewable energy example - since ethical investing is a broader sector than people regard.
Traditional ethical funds - or dark green investments - do take a very restrictive approach to investing, screening out stocks that are involved in “unethical” industries such as alcohol, animal testing, tobacco, oil and armament firms. Nonetheless, for the most part it pays to eliminate sin stocks, such as gambling, alcohol, or firearms, or to over-allocate to industries that meet the individual's ethical guidelines.
Getting advice
Ethical investment, or SRI, is one of the most rapidly growing areas of finance, although the concept of ethical business isn’t entirely a new one. Ethical investment has grown from a small idea and a single fund in the 1980s to a complex industry employing thousands and managing billions of dollars. According to a report, the Ethical Investment Research Service (EIRIS) found that by 2015, more than £15 billion was invested ethically in the UK alone.
Ethical funds have a wide range of different objectives determining what sort of companies they can put money into, and no two funds are the same.
- Negative screening – Avoiding investment in industries which have a negative impact on society and the environment.
- Positive screening – Proactive search for investments that contribute positively to society and the environment.
If you are wanting to invest in a cause that doesn’t conflict with your own moral stance, the best way to decide where to put your money is to highlight and write down which ethical causes are important to you, and which ones you want to avoid.
From there you can come up with an asset allocation plan and begin researching individual securities and funds.
No matter what your intentions are, it's important to fully research a company before investing. Here are some top tips:
- Clarify what you define as ethical, since the term can be entirely subjective.
- Visit a savings and investment comparison site to get an idea of ethical investment options.
- Determine whether the investment is a sound financial decision by reviewing the company's history and finances. For instance some ethical companies could have links with unethical companies.
- Financial return is only one aspect of ethical investing - you must also look into the company's commitment to ethical practices. For example, research their track record and how they've impacted the community in the past.
- Once you've compiled your ethical portfolio you should monitor its progress regularly - and not just for its performance. Ensure principles haven't changed, and that they are still in line with your own.
- That said, performance does matter. Look at your chosen fund's long-term track record - not just the last three years or when growth has been healthy.
- For significant sums – or for pensions – seek formal advice from an ethical Independent Financial Advisor (IFA).
Knowing the mechanics of the business you wish to invest your money in can be empowering: an awareness that it operates in a manner similar to your own lifestyle principles can only be a positive. In the long-term, it is hoped that ethical values will be commonplace, encouraging better corporate behaviour.
From a performance perspective, the world population is growing rapidly and there are marked changes in consumption. More of us will inevitably live in water-stressed areas, and water shortages will be further exacerbated by changes in agriculture and climate change. Therefore, ethical investment is in tune with global consciousness and global drivers for strong long-term returns. Markets associated with this ethical and sustainable movement are growing considerably faster than most other sectors, with demand continuing to rise.