What is ethical investment?

Ethical investments can be a great option for people who want to make a financial return, but not at any cost. By investing ethically, you are choosing to align your investments with your principles. So you can make money, and feel good about it!

A brief history of ethical investments

Ethical, or socially responsible, investments could be dated right back to the 1700s, when the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade – buying and selling humans. Fast forward to the 1970s and many large institutions avoided investment in South Africa until the 1990s due to apartheid.

The most significant move in the UK towards the landscape we now recognise as “ethical investments” was the launch of The Stewardship funds by Friends Provident (now trading as Friends Life) in 1984. The principles of the fund were, and still are:

“to exclude companies that do not meet the ethical standards of the funds or harm society; to support companies that make a positive contribution to society; to encourage better business practices through shared ownership and dialogue.”

Since then, there has been a steady growth in sustainability-themed investments across Europe. Ethical investments are now considered fairly common-place.

How does ethical investing work?

When selecting which funds to invest in, potential risk and potential reward are usually the biggest factors to consider. When you invest ethically, or in a socially responsible way, you are also taking into account environmental and social factors. You’re actively choosing to support companies that benefit the community, or avoid those whose products, services or business practices you morally disagree with.

There is no universal definition of what constitutes responsible or ethical investment, although the main areas of focus tend to be environmental, social and governance. There are lots of different factors to consider as everyone’s moral barometer is different. What, to one person, is completely abhorrent behaviour, is acceptable to another.

For all our clients who express a wish to invest ethically, we conduct a detailed questionnaire to find out how strongly they feel about different, potentially objectionable, choices. It’s a very interesting process because often we’ll ask about an area that our investors would not even have thought of. How do you feel about companies that are involved in tobacco, pornography, weapons, alcohol, nuclear power generation? It can involve a bit of soul-searching!

The outcome is a list of funds which match their moral preferences. From there, we can advise based on other factors, such as the potential return.

The up side of ethical investments

Choosing to invest ethically can limit your options. Limiting your options may compromise your potential for big returns on your investment.

Having said that, there are some fantastic ethical funds these days which are showing great returns.

Investment markets generally have become more complex in recent years. In some cases, funds are taking a slightly broader approach to ethical investment. Rather than simply avoiding investing, funds engage with companies to encourage improvements to business practices. Indeed, it’s been claimed that B&Q’s decision to only buy wood from certified sustainable sources was, at least in part, influenced by pressure from investors. This just goes to show the potential power of ethical investment.

The grey areas of ethical investing

The tricky thing about ethical investing is that there are very few definites. There are a lot of sliding scales. And a lot of contradicting opinions.

Take, for example, child labour. Living in the UK, we might be quick to dismiss child labour as a big moral no-no. But not all so-called ethical funds would discount companies that use child labour. Why? Well, in the country where that child is working, their work might be the only means of earning any money for that family. It might be keeping a roof over their head. If every business refused to employ children, that could mean a lot of families going hungry.

Morally grey areas abound. It is up to the individual to decide how these issues sit with them. It is then up to us to find the right fund for them.

If you’d like to know more about ethical investing, feel free to get in touch.

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