Ethical investing is on the rise; it’s predicted there will be a 173% growth in the UK’s socially responsible investing market by 2027. But what is ethical investing exactly? This article outlines all relevant information on this upcoming investment strategy to help you make great returns whilst sticking to your moral compass.
What is Ethical Investing?
When investing money, your contribution is used to fund the activities of organisations or governments, for example. Unfortunately, it can be difficult to know how your money is being used with traditional investment strategies. This can mean that you run the risk of contributing to sectors or activities that you disagree with. Ethical investing can overcome this moral obstacle.
Ethical investment is a broad term describing all investment strategies that align your values with your investment portfolio. This investment approach considers environmental, social, and governance factors when making investment decisions, rather than just looking at the returns. You can rest assured that ethical investments will contribute towards an organisation or activity that is likely to have a positive and sustainable impact – or at the very least, as little negative impact as possible.
As with any financial decision, jargon can be a significant barrier to those hoping to understand more. To answer the common question: ‘What is ethical investing?’, we have collated a list of ethical investment terms you may experience when exploring the approach:
Disinvestment: Investing in sectors that don’t align with your moral compass.
Impact Investing: Investments that provide measurable financial returns as well as societal impacts and benefits.
Sustainable Investing: Investments that give robust investment returns whilst addressing social and environmental issues.
Light Green Investing: Peruses companies with a positive impact without excluding those perceived to cause harm.
Dark Green Investing: Holds ethical values at the heart of its investment strategy, excluding industries that do not meet ethical criteria.
Sustainable and Responsible Investment (SRI): Various investment strategies that focus on environmental, social, and ethical concerns.
Environmental, Social, and Governance Investing (ESG): Investment strategies that help reduce risk by considering social, environmental, and governance-related issues and opportunities. ESG investing puts the planet’s future at the forefront of its approach, ensuring the investor has both a healthy world and generous returns.
How to Start Investing Ethically
Now we have answered the question: ‘What is ethical investing?‘, you may be wondering how to get started. Below is a list of potential next steps depending on your investment knowledge:
Independent Financial Adviser
If you have limited experience in investments, we advise contacting an independent financial adviser (IFA) to select the appropriate investments for you. To check if your IFA is certified by the Financial Conduct Authority, you can search the Financial Services Register for firms and individuals. Even though using an IFA service comes at a cost, it can save you valuable time and money in the future.
This online investment service usually allocates a portfolio of funds based on several answers you provide, such as the investment risk you are willing to take. This platform acts as a cheaper alternative to an IFA.
If you already have substantial investment knowledge, there are several different approaches you could take:
- Actively Managed Funds and Trusts – Investment funds and trusts allow you to invest in thousands of companies simultaneously. For those that are actively managed, a fund manager will assess companies based on the ethical criteria you provide. For example, they will determine the company’s carbon footprint, ethical transparency, and workforce diversity to determine whether the company aligns with your values.
- Ethical Exchange-Traded Fund – A Passive exchange-traded fund (ETF) replicates the performance of the stock market index. ETFs are more cost-effective than actively managed funds, as they don’t incorporate the service cost for a fund manager. Instead, an ethical ETF will avoid organisations on an index involved in specific activities, such as tobacco or weapons trading, while investing in companies that perform well in ethical activities.
- Picking Shares – Picking shares gives you the autonomy to contribute to individual companies that align with your morals. However, if you want to build a balanced portfolio, this approach can be labour-intensive and costly.
- Bonds, Gilts, and Cash – Green and ethical bonds are examples of fixed-income investments, a more suitable option for cautious investors. The UK Government also issues green gilts, where all proceeds are given to various environmental projects. If some of your investment portfolios are in cash, consider a savings account with a sustainable provider.
The Benefits of Investing Ethically
What is ethical investing? – at its simplest, ethical investing is the perfect way to grow financially while supporting organisations you believe in. There are also additional benefits that go beyond social and environmental responsibility, including:
Between 2014 and 2019, 56% of UK investors increased their allocations to ethical funds. In the UK alone, there is approximately £17 billion already invested in ethical funds, with this figure forecasted to grow over the upcoming years.
The value of all assets can fluctuate, so no investment is ever guaranteed. With that said, the performance of ethical funds is increasing. According to Morningstar Direct Data from 2019, ethical funds outperformed more traditional investments. Those that chose to invest ethically experienced returns of up to 32%; even the worst-performing ethical investments had a positive return of 3.7%.
Popular with Millennials
Ethical investments are becoming increasingly popular with the younger generation. Millennials are twice as likely to want their pensions invested responsibly compared to older generations. This research points towards a positive future for ethical investments.
Positive Culture and Structured Policies
It’s believed that organisations which adhere to ESG concerns are more likely to manage their employees with respect and consider their environmental impact. As a result, they are less likely to experience scandals, fines, and lawsuits due to their positive company culture and structured policies. This can lead to potential material benefits.
It’s hard for a single person to change the world, but your investment choices can make a significant difference. Investing in environmentally and socially responsible organisations can result in generous returns whilst working towards a more sustainable future.