A guide to ethical investing

Many of us care about ‘doing the right thing’ and following our principles and values, whether that’s being environmentally sympathetic or not supporting industries we are opposed to. But what does that actually mean when it comes to your investments, and how can you make sure that your investments are truly upholding your values?

In this article, our expert team at PIL Southampton finds out just that, highlighting everything you need to know about ethical investing. 

What is ethical investing?

Ethical investing is the term used to describe investments that don’t just look at financial returns but also take ethical values into account.

Typical considerations for measuring an investment’s ethical standards could include its involvement in the fossil fuel, gambling, tobacco or arms industries, or its stance on gender equality, workers’ rights and climate change, for example.

Ethical investing used to mean choosing not to invest in particular companies that weren’t aligned with an individual’s beliefs.

More and more, though, we’re seeing ethical investing focusing on companies that are actively making a positive change in the world, or investing in firms to help them to lower their negative impacts on the planet.

What makes an investment ethical?

The main ethical investment approaches are:

Exclusionary

This type of investment avoids companies or assets that you don’t agree with, like gambling or firearms. Taking this stance reassures you that you’re not involved with industries you don’t want anything to do with, however it will reduce the number of companies you can choose from, and the ones you can choose to invest in may not be making a positive impact on the world, only a neutral one.

Impact

Here, you’re investing in companies that are having a measurable and positive real-world impact, for example your fund may be investing in wind turbine manufacturers to increase the percentage of power they are generating. Bear in mind though, from an investment perspective you will have fewer companies to choose from, and there’s no guarantee these companies will achieve real-world impact.

Stewardship

With this form of investment, you are investing in companies to have a positive effect, for example by voting at their Annual General Meetings. This could mean that you have a chance to influence their behaviours and encourage them to make more green-based investment choices.

How can you invest ethically?

To be as sure as you can be that you are investing ethically, you can either take a lot of time to thoroughly research your options, or you could talk to an independent financial adviser, like the team at PIL Southampton, to use their knowledge and experience to advise you.

Will ethical investments make you money? Do ethical funds underperform?

As with any investment, there is no guarantee that the value of your investment will go up instead of down.

There have been periods when ethical funds have not performed as well as standard funds, and there have also been times when they have performed better.

A useful exercise is to compare the performance of the ethical fund you are looking to invest in with a standard, non-ethical fund in the same sector. Check that the fund fees are comparatively reasonable too, as this will affect your level of return.

It’s always sensible to make sure that you have a balanced portfolio to help to protect you from potential downturns in the market.

How can you find out if a fund meets your ethical standards?

You can read the factsheets produced by funds and investment trusts, which will include details about their ethical policy.

To find out about an investment fund or trust’s ethical performance, you can use a search engine for ethical funds, like Fund EcoMarket, to find third-party analysis about their ethical stance. You can also look up fund managers’ voting decisions, on a site like Share Action.

Look out for ‘greenwashing’, which is the term used when companies over emphasise their green credentials without backing it up with tangible action.

The Financial Conduct Authority (FCA) has implemented an anti-greenwashing rule which forbids funds from using wording like ‘green’, ‘responsible’ or ‘sustainable’ without backing up such statements with verified facts.

They have done this by introducing four labels which make it easier to check that you’re investing in funds you’re comfortable with.

How can I start investing ethically?

Think about your values and what’s important to you. You might have to be flexible, as it could be difficult to find an investment that ticks every ethical, environmental and sustainability box that you feel strongly about.

You can invest directly with an ethical company by buying shares, or you can invest through a fund. Which option you choose will depend on your level of experience and confidence in making your own investment decisions.

Other considerations will be the size of your investment portfolio, how long you are planning to keep your money invested for, and the level of risk you are comfortable with.

Regarding any investments and pensions you already hold, you could establish how ethical they are and, depending how closely they align with your values, you could see if it’s possible and practical to change the funds or move away from your investment provider.

How do I choose an ethical fund?

As an investor who is socially, environmentally and ethically responsible, you can read up on fund managers’ literature which should clearly state to what extent they truly follow responsible investing principles.

And, as we’ve mentioned earlier in this article, looking up a fund manager’s voting record can be a useful measure – this can be an indicator that they really want to make a positive difference.

Another thing you can look for is whether the fund you are looking to invest in is signed up to the United Nations’ Principles for Responsible Investment (PRI). Doing so shows their public commitment to responsible investing.

How can you ensure you are investing ethically? 

You need to do your research, or use a trusted financial adviser to guide you, to make sure that an investment provider or fund is delivering on its word, and not just ‘greenwashing’.

Make sure you look at the whole picture; it can be great that a company is providing large scale employment, but are they treating their employees well? 

Keep monitoring the fund or company on an ongoing basis too, so that you know that they are continuing to maintain the values and standards you feel strongly about.

How PIL Southampton can help you 

Our expert team at PIL Southampton is experienced in ethical investing. We would welcome the opportunity to hear what is important to you, and help you to find the right investment fit that will hopefully give you the best opportunity for growth at the same time as upholding your ethical principles.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.