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Ethical investing - being the investor you want to be

Posted by anna sofat on 3 July 2017

Whilst ethical ways of producing products have been around for centuries, it is only in relatively recent history that they have really grown in popularity. Led by a growing awareness of the methods of consumerism and promoted via a number of high profile consumer campaigns, being ethical has never been more popular. In fact, the value of all ethical spending in the UK grew to £38 billion in 2015, making the sector worth almost double that of the tobacco industry (Source: Ethical Consumer).

The trend for all things ethical doesn’t stop with the likes of organic vegetables and free range eggs. Consumers are also actively choosing service providers on the basis of ethical principles and practices, also looking at more ethical ways of investing their money. Generally, the term ‘ethical investing’ is a strategy which seeks to consider both financial return and social good to bring about a social change.

Whilst many of us would choose the option of being more socially responsible if all other things were equal, it isn’t necessarily as simple as this where ethical investment funds are concerned.  

Here we look at three things that you might want to consider in relation to ethical investing.

How green is green?

It may surprise you to know that not all ethical investment funds are equal. Much like there are nuances within and between organic, free range and ethically sourced, there are different tolerance levels within ethical investments and it can be difficult to truly understand what you’re buying into. Furthermore, some providers have proven to have been investing in funds their consumers may not necessarily agree with – for example the revelation last year that a pension fund for academics funded by Cancer Research UK invested £211m in British American Tobacco. This isn’t an easy hurdle to tackle as not all the investments you have will be controlled directly; some, such as pensions and ISAs, are in the hands of third parties.  However, a financial adviser should be able to advise on the best rated funds and providers for you.

The performance factor

One of the most important considerations is that of return on investment. Morally, there can be a conflict between investing responsibly and achieving maximum investment returns from your portfolio. After all, one of the reasons funds such as oil, tobacco and alcohol are included in investment portfolios is because they represent a big chunk of the stockmarket. Having said this, some ethical funds have, by virtue of avoiding potentially ‘risky’ funds, actually outperformed funds made up of a regular mix of stocks (Source: The Guardian).  Ultimately, choosing an ethical fund simply reduces the pool of stocks available to choose from; not necessarily pertaining to stocks of lesser quality or potential. As with any approach to investment, it’s a case of balancing up the pros and cons. Choosing an ethical route will likely have to be driven by a balance of looking to approach investment from a ‘conscious’ perspective whilst simultaneously looking to achieve steady, if not necessarily significant returns.

What’s in a name?

Originally, ethical investment funds were simply comprised of stocks that excluded “sin” sectors such as tobacco and alcohol. The picture has now become much more complex and within the broad term of ‘ethical investing’ further sub-categories have developed, including SRI (socially responsible investing), ESG (environmental, social and governance), and sustainable investing. Depending on the specifics of your personal beliefs and ethics, it might be worth opting for one of these approaches over another.

With a growing number of people voting with their feet and their wallets on environmental and other issues of public concern, it seems that ethical investing is only set to develop. Addidi’s financial advisers are able to provide advice and assistance to clients wanting to follow an ethical investment route. To discuss this with a member of our team, please contact us.