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| April 2010 | Beginners Guide to Ethical Investing |
WHEN Alistair Darling announced the launch of a £2bn Green Investment Bank as part of the Budget last month, the world of ethical investing suddenly got a lot more interesting.
Designed to financially support environmentally friendly energy and transport projects in the UK, the launch comes as the ethical side of life gains a new place among investors, savers and the public at large. Ethical and sustainable living is no longer for the hippies among us, and many of us are openly Good Life converts -growing our own vegetables and recycling the Sunday papers. But public sentiment has also proved to be the driving force behind strong committed moves towards an ethical approach from government, large companies and public organisations, both here in the UK and internationally.
There seems little doubt that the ethical movement is becoming more mainstream all the time. But the question of ethics is a personal one, and what one person sees as a company’s admirable ethical stance is seen by another as a meaningless gesture. So what does green actually mean? Can you really ease your conscience and make some money at the same time? Or, with ethical investing one of the fastest growing areas of financial advice, should you get involved regardless of your moral stance?
Here, we help you separate the wood from the trees.
What’s in a name?
Socially Responsible, Ethical and Environmental Investing are terms often used interchangeably but that don’t mean the same thing. And, more confusingly, different fund managers or investment houses can mean different things by each.
As a general rule of thumb, Ethical and Socially Responsible Investing (SRI) focus on the ethical management of people including human rights and social justice, consumer protection and diversity as well as environmental stewardship and animal welfare. An ethically-oriented company or fund will usually avoid getting involved with the gambling, alcohol, military, and tobacco, for example.
Meanwhile, Ecology or Environmental investing is oriented more towards the way we treat the world around us, including other species, rather than the way we treat each other and will look at everything from reducing pollution and protecting habitats around the world to wind farm development around the British Isles.
Shades of Green
Once you know what kind of activities you’re most interested in, it’s time to decide just how committed you are – what your shade of green is. The darker green, the more absolute your approach. Lighter greens could mean you invest in companies that are simply improving their ethical status whereas if you’re a dark green investor you may wish to only invest in companies that, for example, are directly involved in renewable energy like wind turbine manufacturers. And that’s important because ethical stock-picking can be based on positive or negative screening, or both.
Negative screening is straightforward and is exactly what you would expect from an ethical investment. Your fund manager or product provider will avoid investing your ethically earmarked money in companies that are linked with unethical practices, including environmental damage, armaments and the military, alcohol, human or animal abuse, tobacco and pornography.
Positive screening means your fund manager will actively look for companies that offer positive action in pollution control, its conservation and recycling policy, environmental protection, and ethical employment practices. That means you could be investing in surprisingly mainstream companies, including the likes of Vodafone and RBS, but because positive screen also means that any companies with improving or exemplary pollution prevention policies could make it regardless of their motivations for doing so, including oil companies and fast food organisations.
Once these criteria have been chosen, many funds have a panel or committee to make sure the fund’s underlying investments meet them. So how you invest ethically will depend on whether your particular shade of green and your attitude to risk matches that of fund manager. Ask yourself if you would rule out alcohol producers if you’re not teetotal yourself? Are you happy to invest your ethical money in the mining sector if it is cleaning up its act? Can you overlook environmental mis-demeanours if a company has a squeaky clean approach to human rights or vice versa?
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How does it stack up?
With growing investment at the grass roots level, many believe the ethical sector is the one to watch. Along with the government’s Green Investment Bank initiative, legislation is pushing us as a nation towards a more sustainable and responsible way of living, adding to the potential for growth in this sector.
As with any investment, your attitude to risk should play an equally large part as your ethical approach in how you investment your ethical money. It all sounds good and seems like a great way of both getting in on the potential for dramatic growth in a growing movement and helping us sleep at night. But what’s the bottom line?
Past performance is no guarantee of future results, but across the UK Ethical sector, funds were up by an average of 22% in the year to 31 March, but still down 13% over the economic rollercoaster of the three years. However a large handful, including F&C's International Heritage and Stewardship funds, and Henderson's Industries of the Future have consistently performed positively over that time.
Of course, if you decide to restrict your criteria further, be prepared for tougher conditions. Of the 15 Ecology investment funds registered in the UK - focusing on the environment - only 7 have been going for three years or more. Only one of those, the Amundi Funds Aqua Global fund at 10.1 per cent growth over three years, has offered investors positive returns and the average three year performance to 31 March was -8.52 per cent according to Morningstar - albeit during an unprecedented period.
An Ethical Life
Finally, bear in mind that introducing an ethical slant on your finances isn't just about your investments. Ask your financial adviser about ethical mortgages, banking, insurance and child trust funds.
FOR MORE INFORMATION ABOUT ETHICAL INVESTING OR TO DISCUSS ANY ASPECT OF YOUR FINANCES, YOUR FINANCIAL ADVISER IS HERE TO HELP.
WE LOOK FORWARD TO HEARING FROM YOU.
Please note, these guides and summaries are intended to provide background and introductory information on a range of financial subjects only. Individual decisions should not be based on this information. Instead your financial adviser is ready to discuss your individual circumstances and financial goals.
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