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Ethical Investing – What You Need to Know

Ethical investing is not a new concept; it has been around in its current form for over 30 years but dates back to the 19th century in origin. All it means, however, is that investors are given the opportunity to include their ethical values when making decisions about their investment portfolio.

This does not constitute advice and advice should be sought in all instances before acting on it.

Since its inception, ethical investing has undergone quite the transformation and has now developed subcategories:

  • sustainable investing
  • impact investing
  • SRI (socially responsible investing), and
  • ESG (environmental, social, and governance)

No matter what you call it, at its core, it’s simply about aligning your investment choices with your social and environmental beliefs.

Light and dark

When ethical funds started gaining traction, they were classified based on what “shade of green” they were, with a focus on excluding certain funds.

Light green funds were “light touch” with reduced, relaxed criteria for investing. Dark green funds were stricter and took into account a wide range of ethical concerns.

This type of classification made it increasingly difficult to find investments that would meet the high standards and as a result, reduced the ability to diversify.

Positive and negative

The investment world moved on from exclusively classifying funds as light or dark. While exclusion strategies are still employed, these days, fund managers will seek out companies that offer a positive impact on society.

A portfolio might include companies that have a solid equal opportunities policy and are open about their business practices and may focus on businesses with the following specialties:

  • sustainable forestry
  • provision of social housing
  • animal welfare
  • energy conservation
  • renewable energy

Before you filter in positive companies, you’ll screen out businesses in negative industries, those that go against your beliefs, or those with poor employment practices such as:

  • tobacco and alcohol production
  • oppressive regimes
  • gambling
  • fossil fuels
  • nuclear weapons

Ethical investing is evolving

Ethical investing evolved into Socially Responsible Investing (SRI) because this particular strategy considers both the financial returns and the social good of a business. And from there, terminology progressed even further to ‘ESG’ investing.

ESG is a broader, comprehensive descriptor, breaking down into environmental, social, and governance. The criteria involved in each are described below:

  • Environmental – How a company manages its carbon footprint or how they control pollution, reduce the use of single-use plastic, and help with conservation, etc.
  • Social – Factors such as working conditions and consideration for employee health and safety as well as involvement in local community interests and projects.
  • Governance – The foundation of a firm’s operations, including the company’s use of accounting standards, transparent business practices, and managing conflicts of interest.

It’s important to remember that ESG investing and ethical investing are not one and the same. While ESG investing is based on ethical investing and incorporates the same principles, ESG does not utilise negative screening.

An example of a company that could be included in an ESG based plan but not an ethical investing plan is a tobacco company. Based on the criteria for ESG, it might be a sound investment, but it would never make the cut in a conventional ethical investment plan.

Impact investing

This type of investing goes a step further than SRI as it includes investments made into companies, organisations, and funds that produce a measurable, beneficial social, or environmental impact alongside a financial return.

Is it right for me?

It’s hard to decide if ethical investing is right for you. While it might ease your conscience to incorporate some ethical funds as part of your diversified investment strategy, you might not need to go all the way and assign a term to the style of investing you do.

As always, working with an independent financial adviser will help you cultivate your ideal investment portfolio, continually reviewing and improving the ability to provide you the kinds of returns you need to succeed.

Want to choose ethical investments?
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