A bit of explanation on “Green” or Ethical Investments
When you invest money, your money will be used temporarily by someone else – such as a company or a government, to fund their activities. But what if some of these activities clash with your personal values, or those of your own business?
For instance, if you had a relative who gambled the family jewels and inheritance away, you probably wouldn’t want anything to do with gambling or a particular organisation may find itself embarrassed by the investment choices that have been made- for example a terminal disease charity having funds in carcinogenic practices such as Tobacco. That is not in good taste, and would I’m sure lose that charity a lot of money.
When you invest-it’s very difficult to tell where the funds are coming from and what they are funding, but you have a much better chance of being able to tell, if you invest in Ethical funds.
What is an “Ethical” Investment
The term ‘ethical investing’ in my opinion covers a very wide range of types of investment. Overall, it just means that as well as growing your money to beat inflation and receive good returns (hopefully!) you also want your money to be used for “good” in the world. Who wouldn’t, if those returns were as good as those that traditional investments gave?
For example, one ethical investor might simply aim to avoid putting their money in industries known to cause harm, such as tobacco, armaments or gambling. A more rigorous ethical investor may look to invest in companies with particularly high standards with regard to the environment, society and how they are run. These standards are known as Environmental, Social and Governance (ESG) criteria, and are often used by socially conscious investors to screen their investments.
Traditional investments are not “bad” investments just because Ethical ones invest in “good”-it just means that sometimes, those traditional investments may not fit in with an Investors “ethics” or “ethos”, and that Ethical Investment is preferred because of that.
What is “ESG” Investing
ESG stands for ‘environmental, social and corporate governance’. These are generally thought of to be the three main factors when looking at the sustainability and impact of a business or another organisation.
Environmental factors look at the organisations carbon footprint, its contribution to other forms of pollution, its sustainability (renewability) and other impacts it may have on the environment. Ethical investors typically look for activities in these businesses that offset these effects.
Social factors include the diversity of the business workforce, how inclusive it behaves, how it actually fulfils its responsibilities towards its consumers, and its working policies relating to them.
Governance is directly shown through how a company is run, its overall structure, and the way in which all employees are treated, especially comparing the Management to the actual worker bees. Is the treatment of EVERYONE standardised and fair...?
Are there different strengths of Ethical?
How strict do you want to be? If you are content just to avoid certain types of industries or business practices, then Socially Responsible Investing (SRI) may be enough for you. SRI funds set broad criteria when constructing a portfolio, to screen out less ethical companies. However, SRI funds tend to focus on ‘best in class’ companies rather avoiding whole industries, so may include (for example) oil companies that show more responsibility than their competitors. Such funds are sometimes described as ‘light green’.
If you want to go a little stricter, then you may want to look at fully ethical funds. These will hand-pick companies to invest in based on their strong ESG criteria and will exclude any that don’t meet its standards. Such funds may be described as ‘dark green’ or “medium green”.
Another kind of fund is a ‘passive’ ethical investment fund. A passive fund invests in a range of ordinary companies, regardless of their ethical slant, and then uses its position as a significant shareholder to try and improve any ethical concerns by voting on resolutions. This may or may not influence “greening up” the companies involved!
Does ESG/Ethical Investing really work..
There is an awful lot of evidence to suggest that so far, it really is working. Because there are two benefits for people. Returns, and “Good”.
There maybe times when so called Ethical investors, may have to trade their beliefs against making a return, and make a call, however, there does seem to be evidence to show that this may not have to be the case. Before Ethical investments were even a thing in 2008, the financial crisis revealed that Islamic Banks that held Sharia Compliant funds avoided most of the losses in the banking industry at that time.
A successful ESG fund will generally target companies that are profitable first, and only then consider their ESG credentials, rather than just investing in anything with good corporate responsibility. This will give you another edge.
Why is ESG Investing so important?
There is no point having a huge investment pot if at that point the planet is no longer a pleasant place to live. ESG investing really looks at the whole picture, getting you to the point where you have both money and a healthy world in which to spend it.
This is also something to think about- This quote from Richard Curtis the comedy writer, has always stuck in my mind for never underestimating the effect the goodness your money can do in terms of planet saving “Moving your savings to sustainable funds can be 27 times as effective at reducing your carbon footprint than eating less meat, using public transport, reducing water use, and flying less combined,”
Richard Curtis has become somewhat of an expert in this field since launching a campaign that aims to help move some of the £3tn in UK pensions out of industries that are harming people and the planet and into sustainable businesses.
How can my IFA help?
Choose Independent, not restricted Financial Advisers.
They are unbiased, and unrestricted when looking at your financial products, and can source from the whole of the marketplace. This means “Choice”. It also means economy, and it also means bespoke.
Secondly, an IFA will be experienced in identifying funds and comparing them objectively. Quite simply, they know what to look for and what qualities and/or risks to be aware of. They won’t inevitably make the right call every time – but the odds of them picking good funds (if fund picking is what they offer) are very much better than the odds of anyone doing it by chance, or after a few hours of online research.
Thirdly, it’s much simpler and easier to use an IFA. You simply talk to them about your investment needs and your ethical preferences, and the IFA goes away and finds suitable funds for you to choose from. The difference in returns between good and poor funds can be dramatic, which in many cases will more than justify the IFA’s fee.
There are other benefits over and above all the good stuff we have spoken about regarding this type of investment- many of these green industries linked to Ethical investments get government subsidies, and with this comes natural growth... giving better returns long term, especially within the sustainability arena. Sustainability equals “long term”, and long term is at the core of good investing. Competent governance of good companies also means stability. This is means less of the “ups and downs” we experience every day in the investment world, - we call this “volatility”.
This type of investing is becoming more and more popular, especially amongst the younger clients I have, and in my opinion will become a core way to invest in the very near future.