Making an impact with your investments
If you would like to align your investment choices with your social and environmental beliefs, then investing ethically is something you should consider.
Investing ethically has a very long history in the UK going back to the 19th century with religious orders, such as the Quakers and Methodists, who sought to exclude investing in ‘sin stocks’ such as tobacco and alcohol.
There has been a significant transformation in ethical investing since those days and now there are many other terms used to reflect types of ethical investment such as:
- Sustainable investing
- Socially Responsible investing
- ESG (Environmental, social and governance)
- Impact investing
This can all get very confusing. In this short guide we’ll take you through how this area of investment is developing; why we think it is becoming more important; and explain some of the terminology and processes used to help you understand ethical investing.
A brief history of ethical investing
- The origins of ethical investing can be traced back to religious groups such as the Quakers and Methodists, who sought to exclude profiting from ‘sinful stocks’ such as alcohol, gambling and tobacco.
- Charities and some philanthropists adopted this exclusionary method of investing to ensure that their investments were not at odds with their charitable or personal beliefs.
- 1971 – The Pax World Fund was launched in the US inspired in part by anti-war activists in response to the Vietnam War.
- 1983 – EIRIS (Ethical Investment Research Services) was established as the UK’s first independent research service for ethical investors.
- 1984 – Friends Provident launch the first ethical fund in the UK, the Friends Provident Stewardship Fund.
- The increase in global news broadcasting starts highlighting to far wider audiences the environmental impact of deforestation and human rights abuses by companies within the supply chain.
- End of the 1990s – approximately £3.3 billion invested in the UK across 50 ethically focused funds.
- 2000 – UN Global Compact is founded to encourage businesses worldwide to adopt sustainable and socially responsible policies.
- The rise of social media brings more issues to people’s attentions, leading to a growth in ethical consumerism.
- 2015 – 17 Sustainable Development Goals are set by the UN covering key global criteria including no hunger, reducing inequality and climate action.
- 2015 – The Paris Agreement is drafted bringing the impact of climate change and carbon emission to the forefront globally, with environmental issues becoming central concerns for numerous nation states and international companies.
- According to the Financial Times the UK Ethical Fund market size was over £16bn in 2018 and growing.
The evolution of ethical investing
Shades of green
In the early days of ethical funds, the focus was on exclusions and which company shares were screened out due to set criteria. This saw funds classified on what ‘shade of green’ they were.
These were relatively light touch, with more relaxed or fewer investment criteria to be met for a company share to be included.
These funds would progressively take into account a wide range of ethical concerns and have strict standards for implementation.
The more ethical considerations that are screened leads to more company shares being excluded, which makes it more difficult to find eligible investments and therefore reduces diversification.
Positive and negative screening
Over the years, ethical investing has evolved. Although excluding certain stocks or sectors of the market still applies, many fund management teams will seek out companies they consider are providing a positive contribution to society, for instance, companies that fund social developments or provide clean energy.
In many cases, fund management teams will employ a combination of both negative and positive screening, starting with a negative screen to exclude unwanted areas and then applying a positive screen to identify the most attractive companies in which to invest.
Socially responsible investing
This is an investment strategy which seeks to consider both the financial returns and the social good of a company. Focus tends to be more on how positively a company is assessed and the fund management team would also look to actively engage with company management.
This terminology started to replace the use of ethical when it came to fund naming but even socially responsible has since been superseded by the acronym ESG.
This is the new, all-encompassing investment term, which is often used to describe different types of ethical investing. It stands for environmental, social and governance.
The criteria used to evaluate this can range from a firm’s carbon footprint to examining a company’s approach to managing pollution, reducing the use of single-use plastic and helping with conservation. Fund managers can exclude companies that fail to meet certain criteria or engage with them to make them perform better.
Social factors broadly encompass a company’s business and societal relationships, such as its working conditions and regard for employee health and safety as well as its impact on local community interests and projects.
These criteria are generally fundamental to a firm’s operations. This involves assessing the company’s use of accounting standards, transparent practices and managing conflicts of interest.
ESG investing is mistakenly used to refer to ethical investing but this is not the case. Although ESG investing incorporates the fundamentals of ethical investing, there is no negative screening used.
For instance, a tobacco company may score highly on its ESG rating and so, judged on that basis, could be considered for investment. However, a tobacco company would never be considered for investment in a traditional ethical fund.
Impact investing refers to investments made into companies, organisations, and funds with the intention of generating a measurable, beneficial social or environmental impact alongside a financial return.
Historically, impact investing was philanthropic, focusing more on addressing social and environmental needs with financial returns being secondary. This has changed so that at least equal focus is now given to performance as well as addressing social and environmental issues.
United Nations Sustainable Development Goals
In the current climate, you will hear many ethical fund managers and ethical funds reference the fund portfolio against the United Nations Sustainable Development Goals (UN SDGs).
The SDGs are 17 global goals established in 2015 to provide the blueprint to achieve a better and more sustainable future for all. The goals address key global challenges related to poverty, inequality, climate, environmental degradation, prosperity and peace and justice.
The goals interconnect and the intention is that each goal is achieved by 2030.
Source: United Nations Department of Global Communications
Is ethical investing for me?
Ethical investing is not for everyone. People’s values vary widely and what one person may see as a cause for concern may be disputed by another. Incorporating some ethical funds as part of your overall investment strategy could be considered even without an ethical motive, on the basis of diversification, risk management and portfolio performance.
After reading this guide you may have a clearer idea about this growing area of investment and the kind of approach you would like to adopt.
In essence you will have to consider if:
- There are areas you specifically don’t want to invest in You have to bear in mind that the more areas you want to exclude the smaller the investment universe becomes. This could increase risk due to a lack of diversified investment options.
- There are no areas you specifically want to exclude But you would like to invest in funds that consider their environmental and social impact, especially those that look to provide solutions to problems such as healthcare, clean water and carbon emissions.
Planning your ethical investment strategy
Chase de Vere can guide you independently through the myriad options available to ensure that your investment strategy aligns both with your financial goals and your moral philosophy.
Investment can go up and down in value, do you could get back less than you put in.