What is ethical investing, and should I be doing it?

Posted on April 27th, 2020 | Categories - Investments, News

Whether factoring your carbon footprint into your choice of holiday destination, picking your energy supplier, or thinking about the food you put on your table, ethics might be playing an increasingly large role in the decisions you make.

With David Attenborough, Greta Thunberg, and Extinction Rebellion putting climate change in the headlines, it’s also firmly on the political agenda. In the world of finance, ethical investment – focused on environmental, social, and governance factors – is also on the rise.

Investor Chronicle recently reported that ‘£4.5 billion has been invested in ESG funds’ in 2019.

If you haven’t looked into it yet, here’s your guide to ethical investment.

What is ESG investing?

As an investor, you can choose where to place your money and that might mean investing in the companies whose values most closely align with your own. You might be concerned about the environment, or be more worried about the societal consequences of your investment.

This might mean investing with companies committed to reducing plastic use and increasing recycling. Equally, you might look to the human rights reputation of a company’s supply chain or look to firms that support local communities.

As well as a poor record on environmental issues, involvement in the manufacture or selling of arms, tobacco, or any activity related to gambling, would likely prevent ESG investment.

ESG investing’s key concerns can be broken down into three main factors:

  • Environmental

Environmental factors might include a business’s reputation on issues around climate change, sustainability, and pollution. Companies that actively seek to lessen their impact on the environment will appeal to ethically minded investors.

  • Social

Good working conditions, fair wages, and involvement in the community would all be factors for those looking to invest in companies with a strong social conscience.

  • Governance

Governance factors include ethical internal practices such as the democratic appointment of shareholders, transparent accounting, and legal business practices.

What makes an investment ethical?

How these ESG factors are taken into account can vary, with individual companies and fund managers all having different approaches.

Here are a few of the most common:

  • Negative screening means not investing in companies engaged in activities deemed unethical, such as gambling, tobacco or alcohol
  • Positive screening means actively seeking out those companies that benefit their communities
  • ‘Best in class’ selection involves picking a company based on their ESG credentials relative to other companies in the same sector.

Does ethical investment mean accepting lower returns?

Ethical investment doesn’t have to mean making a compromise on returns. In fact, recent research by Morningstar found that ‘41 out of 56 of their ESG indexes have outperformed their non-ESG equivalents (73%) since inception’.

The Triodos Global Equities Impact Fund has returned ‘78.3% over five years… £10,000 invested in the fund in September 2014 would have been worth £17,830 in September 2019’.

The continued growth of ESG investment

FTAdviser recently reported that investors placed an average of £124 million a week into UK ESG funds in 2019, sure proof that investors are increasingly aware of the ethical issues around the environment, equality, and the need for responsible company management.

This table shows investment into ESG funds from 2013 up until the end of October 2019.

As well as climate change, other factors that have led to increased public awareness include the recent report on the gender pay gap at the BBC and the continued impact of the 2008 financial crisis.

Research from Triodos Bank suggests it is a trend that isn’t due to slow down. They predict 173% growth and a ‘market worth £48 billion by 2027’.

The FTAdviser meanwhile, reports that more than half of millennial investors (52%) are already investing sustainably.

Get in touch

If you’d like to discuss any element of ethical investment, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

Investments carry risk. The value of your investment (and the income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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