Ethical investing: How to get started
People used to call it nuts – but ethical investing has changed radically.
Whether its termed ethical, responsible, or sustainable investing, the aim is generally the same. It's investing your money in businesses which have some intention of making the world a better place.
Barely a week goes by without newspaper headlines about corporate tax avoidance, excessive pay packages for chief executives, or bad behaviour at the banks. These concerns irk ethically-minded investors and rank alongside more long-standing concerns such as human rights, protecting the environment and treating animals kindly.
No surprise then that interest in responsible investing is growing. There was nearly £10bn of UK money invested in socially responsible funds in 2014, according to the Investment Association. It's a small slice of the overall stock market, and interestingly, the UK remains some way behind other countries in Europe in terms of the amount of money given over to ethical investing.
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NOT NUTS ANY MORE
Responsible investing has come a long way in the last 30 years. The UK’s first mainstream ethical investment fund was launched in 1984 by Friends Provident, and at the time it was rather unfairly called the ‘Brazil fund’ – because you would have to be nuts to invest in it.
It's radically different today. There's a wide market of responsible investment funds – and experts who invest ethically – which can cater for every conscience. You can invest in well-known companies which have promised to do better for the environment or to protect human rights. You can invest in everything except tobacco companies, weapons and big banks, for example. Or you can actively seek out investments in wind and solar energy or bamboo plantations.
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HOW TO INVEST
There are two ways of going about investing your money. The first option is to contact wealth managers or investment advisers who cater for the ethically-minded. Websites such as unbiased.co.uk or findawealthmanager.com can help with this.
A manager can build a bespoke portfolio of investments in the shares of companies in a way that mirrors your beliefs. They manager will justify the inclusion of each company so you'll have full control over how your money is invested. But it doesn't come cheap – there will be fees to pay for the service – and most managers will require a minimum investment size before they will consider working with you.
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The other option is put your money into an off-the-shelf investment portfolio, called a fund, pooling your savings with other investors in the same collection of company shares. Each fund will take a slightly different approach.
“Some investment funds use negative screening where they avoid companies which are engaged in ‘harmful’ activities such as tobacco or gambling,” explains Patrick Connolly of Chase de Vere.
“Others use a positive screening approach where they actively target companies which might make positive contributions to society or the environment.”
A third approach is to invest in “best of breed” companies. For example, some ethical funds won’t hold shares in oil companies because they do harm to the environment, while others will hold only oil companies they consider best of breed, which cause less damage or are committed to cleaning up their act.
There are examples of the most popular funds to the right, and any of these can be invested in through a Stocks and Shares Isa or Sipp. The essential point is “it's important investors understand the different nuances of the funds, so that they can pick the best fund to match their own views,” says Darius McDermott of Fund Calibre.
WILL I LOSE OUT?
The million dollar question. It's something of a myth that ethically-biased investment funds will necessarily make less money. One measure, the commonly used MSCI World SRI index, made 19 per cent in the last five years compared to the 16 per cent from its non-ethical counterpart, the MSCI AC World index.
This has been especially clear during the recent downturn in the oil sector. Responsible funds which avoided battered oil stocks have done well. But responsible funds can be less well diversified, because they are excluding certain parts of the stock market.
“Ethical portfolios will also tend to be skewed toward mid and small cap companies, as they are less likely to be causing any harm or damage, which again can make these portfolios more volatile,” says Connolly.