How to be an ethical investor

How to be an ethical investor

It's national ethical investment week, but can you truly be ethical and make money at the same time?

The amount of money invested in ethical funds is nearly three times as much as a decade ago, according to the Investment Management Association. In June 2011, it recorded over £7 billion worth of funds under 'ethical' management.

What makes an investment ethical?

Despite the surge in popularity there is no agreed definition of 'ethical investing'. This means investors may find it hard to decipher whether a prospective ethical investment is truly ethical.

The investment industry has different ways of measuring whether an investment is or isn't ethical.

Negative screening

Rather than looking for specific ethical or socially responsible ethical investments, negative screening filters out stocks that wouldn't sit comfortably in an ethical category – think arms, tobacco, oil, gambling, deforestation and regimes with a poor human rights record. That means whole sectors can be discounted.

Positive screening

Seeks out the companies and stocks that are committed to producing goods or services that will benefit the planet – be it environmental, such as forestry and renewable energy projects, or humanitarian, such as welfare, healthcare and disaster management.

Light green funds

Less restrictions allows light green funds to invest in larger companies – even in some unethical sectors like animal testing and pesticides. The focus is then on companies that are well managed and socially responsible – known as a 'preference strategy'.

Medium green funds

A halfway house between light and dark green funds, medium green funds are still exposed to some stocks of companies that have a less-than-perfect record.

Dark green

These have the tightest restrictions in place and will automatically exclude all stocks that have any exposure to non-ethical sectors. Research teams will also look to seek out companies that are actively engaged in bettering society or the environment rather than simply holding a neutral position. 

Can savers be ethical too?

Rising inflation means savers have all but given up hope of finding a savings account that matches, let alone beats inflation. Saving with ethical banks like Triodos and the Co-operative Bank won't offer the best interest rates but at least you know your money will have a positive effect.

Research from Triodos Bank shows that 74 per cent of UK savers would like to see the banks do more to help society.

Triodos calls itself a sustainable bank and promises to only use customers' money to help people and businesses that are working towards 'a positive change'.

Meanwhile, the Co-operative has vowed to extend its commercial lending to ethical businesses and causes to £9 billion this year.

Finding an ethical IFA

Although ethical or socially responsible investments (SRIs) are growing in popularity, it's slow progress – especially when 76 per cent of non-ethical investors claim their independent financial adviser hasn't mentioned ethical investing to them, according to a survey conducted by Ecclesiastical Investment Management. The fund manager also reveals that 64 per cent of these non-ethical investors would consider investing in SRIs if their adviser had gone through the options with them.

To find an IFA with an ethical approach, go to the Ethical Investment Association's website (ethicalinvestment.org.uk).

This was written for our sister website, Moneywise


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