Investing Ethically

What is ethical investment?

Put simply, ethical investing is putting your money into companies that you believe make positive contributions to society - either through environmentally friendly and employee friendly practices, or by dedication to education and training or health and safety. It also allows you to eschew businesses that go against your principles, such as those involved in tobacco, pornography, the arms trade, animal testing, gambling and nuclear power.

These respectively are called the “supporting” and “avoidance” approaches. There is also the “engagement”, or “influencing”, method, in which the investment fund does not apply a screening criteria to its investment choices. Instead, the fund manager undertakes to negotiate with certain companies on specific social and environmental issues. The aim is to encourage them to adopt the best business practices.

Does it pay to invest ethically?

There is the theory that ethical investment can make good financial sense because companies that behave responsibly run less risk of hitting problems with regulators, costly court actions, strikes and boycotts of their products. Since becoming available in the UK in 1984, ethical trusts and funds have often matched or beaten their non ethical counterparts.

However, studies by organisations including the charity Ethical Investment Research Service (EIRIS) (www.eiris.org) indicate that investing according to ethical criteria may make little difference to overall financial performance. Five ethical indexes created by EIRIS produced financial returns roughly equivalent to the returns from the FTSE All Share Index.

Some ethical funds perform as well as more traditional funds, but others lag behind because large companies with sound track records – which often drive the growth in popular benchmarks like the FTSE 100 or FTSE All Share indices – tend to have diverse interests, and as a result they are less likely to meet a fund manager’s ethical criteria. This means that ethical funds have a natural bias towards smaller companies, seen as a riskier prospect than larger companies with greater financial clout.

Nevertheless research suggests that over the medium-to-long term, an ethical investment policy need not damage your investment returns.

How do I invest ethically?

Some financial institutions such as the Co-operative Bank (www.co-operativebank.co.uk), Shared Interest (www.shared-interest.com) and Triodos Bank (www.triodos.co.uk), offer savings accounts that will ensure your money is not lent to companies that violate any number of ethical concerns. But the price of a clear conscience may be slightly lower interest rates because most of the leading accounts come from less ethically responsible banks and building societies.

If you want to invest in the stock market, there are now more than 50 retail ethical investment funds in the UK with an estimated total value of around £4bn. There is also a large amount of institutional investment money that is screened according to ethical criteria. To discover whether a particular fund matches your own concerns, you should study the fund manager's stated investment policies.

If you prefer to invest directly in shares, EIRIS, which aims to raise public awareness of ethical investment, will screen your existing portfolio for positive and negative features and create a list of companies that match your chosen ethical criteria. Investing directly will give you the right to attend a company's annual general meeting, when you will be able to raise any concerns with the business’ bosses. In addition to external research groups, many fund managers such as the Friends Provident Stewardship (www.friendsprovident.co.uk) range of funds, also have an in-house research team and a panel that sets criteria and establishes or monitors the approved list of companies.

Further details

For more information about ethical investing and information about how to find the best ethical investment advisor, visit Guardian Money (www.money.guardian.co.uk/ethicalmoney), Money Extra (www.moneyextra.com/faqs/ethfaq3.htm); Tiscali Money (www.tiscali.co.uk/money), EIRIS (www.eiris.org), or the Ethical Investors Group (www.ethicalinvestors.co.uk).

 

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