By Andrew Gilmore, chartered financial planner at Active Chartered Financial Planners

In the media, we see more and more about society becoming more ‘woke.’ There is more emphasis on making ethical choices, whether this is in the products we buy, the holiday destinations we visit or the celebrities we follow on Twitter. The same can be said for where we invest our cash. Can we make our money work for us while maintaining a clean conscience?

I have observed a growing number of potential investors who are concerned with the moral decisions taken by world governments and organisations, as well as the question of environment and sustainability. In short, people are thinking more about how their money may be used when investing in funds.  The associated investment in the underlying companies, governments and activities they undertake, and whether their money may be used to benefit the environment, wellbeing, and sustainability.

In the UK, environmental activist group Extinction Rebellion has recently stepped back into the limelight following a brief, coronavirus-forced hiatus, so climate change is again high on the public agenda.  Although the protests and demonstrations can be a prickly subject, they certainly raise awareness and force us to consider what is happening and what we can do to prevent further ecological crises.

In addition to this, the financial advice sector overall will be changing to put the clients’ ethical views at the forefront. Clients will be asked for their thoughts and feelings, and these will then be taken into account when decisions are made about investments.

In the past year, our firm has seen an increase in enquiries about how to invest ethically. As this topic comes with its own brand of jargon and acronyms, including SRI, ESG, SDG and ‘Impact Investing,’ I wanted to take the time to clarify what these mean and how they impact the investor.

What is ethical investing and why are people choosing it?

Ethical investing seeks to provide both a financial return whilst having a positive social and environmental impact. This type of investment strategy would typically avoid firms which may be involved in stigmatised activities, including smoking, alcohol, gambling or the arms trade, as well as having a negative impact on the environment.

While some people believe that ethical investments ultimately produce lower returns, further research suggests that shares of ethically responsible companies can perform equally well over three to ten years and beyond, because their stock prices see less negative impact from industry fines and negative press.

This has made them a more attractive prospect, as investors can think with their hearts without it hitting them in the bank balance.

What new terminology do I have to be aware of?

1. Ethical investing: Ethical investing itself focuses on screening for negative activities and avoiding placing capital in companies that invest in taboo or potentially harmful practices, which could include companies which use child labour or non-Fairtrade cotton. The practices of such firms have come under more intense scrutiny over the past few years, creating a choice in investment types becoming available.
2. Environmental, Social and Governance (ESG): ESG investing focuses on companies demonstrating their own governance practices in relation to the environment, social responsibility. Unlike traditional ethical screening, this places a focus on positive screening, that is, what the company is actively doing to be ethical, rather than what negative practices they engage in to make them unethical.
3. Socially Responsible Investing (SRI): SRI aims to provide positive social outcomes through its investments, making it a blend of traditional ethical investing and ESG but with a more measurable approach. It screens out potentially unethical stocks first and then concentrates on a company’s ESG approach, providing a more comprehensive approach to investing ethically.
4. Impact investments: Impact investments are made in emerging and developed markets and focus on an outcome or impact that will be ethically positive. These companies harbour the intention to generate a beneficial social or environmental impact alongside a measurable financial return. In some instances, these companies may be screened out under other approaches, however could fall into this category if they are working towards becoming more sustainable.
5. Sustainable Development Goals (SDG): SDGs are part of the United Nations (UN) blueprint set out to “achieve a better and more sustainable future for all.” There are 17 goals in total, including:
   

   Andrew Gilmore

• No poverty
• Zero hunger
• Good health and wellbeing
• Gender equality
• Clean water and sanitisation
• Affordable and clean energy
• Climate action

Does ethical investing really work?

Although it may seem like a fairly new phenomenon, ethical investment has been around for a while. Shareholder activity contributed to the defeat of apartheid in the 90s and led to more ethical practices by a well known supermarket in the mid-00s.

According to the Global Sustainable Investment Review 2018, at the beginning of 2018 global sustainable investment had reached $30.7 trillion in the five major worldwide markets; Europe, USA, Japan, Canada and Australia/New Zealand. This demonstrates a 34 per cent increase over two years.

One of the primary arguments against ethical investing has been the lack of suitable investment solutions and product development. This argument is countered, however, by an increase in investment providers promoting these product ranges more frequently. This, in turn, has improved availability and awareness in the last few years.

A further challenge, as previously mentioned, is regarding how the investment performs There is a persistent impression that investment returns must be sacrificed if you wish to focus on a social or ethical impact. This comes primarily from the preconception that unethical activities will yield greater profits. This could be, for example, because a ‘sweatshop’ will pay its workers significantly less than a Fairtrade counterpart. While this might be true in the short term, over the course of several years, these investments can prove just as lucrative.

Research in 2018 by the Global Impact Investing Network (GIIN) shows clients are ideally searching for a balance of achieving social responsibility whilst maintaining average market returns. They don’t want to throw their money away or find themselves short when they come to draw their investment, but they also want to make a difference.

GINN found that, from a financial performance perspective, the majority of clients that are choosing ethical investment products are either in line with or outperforming their expectations, with only nine per cent feeling the investments are underperforming relative to their expectations.

With this in mind, we could see more high net worth investors choosing to back companies with a strong ethical compass, rather than their less virtuous competitors. Will the ‘woke’ generation use their money to change the world? Only time will tell.

The value of your investment can go down as well as up and you may get back less than the amount invested

The information provided must not be considered as financial advice. 

We always recommend that you seek financial advice before making any financial decisions.