60 second guide to... Ethical investment

How can you invest your money in the right green business?

Many of us don’t think of ourselves as stock market investors. But if you have a pension, ISA or savings in a unit trust, the chances are that your money is being invested in companies listed on the stock market. And some of them could be involved in activities that you might not approve of.

Q:
What is ethical investment?
A:
Ethical investment is about aligning your principles with your investments. This can mean avoiding investment in companies involved in controversial industries, such as arms manufacturers or those with a bad record on environment and human rights.

Some people invest in companies that actively make a positive contribution to the planet, such as by tackling climate change, poverty or promoting fair trade.
Q:
What are the roots of ethical investment?
A:
Ethical investment goes back to the 19th century when Quakers in Britain and Ireland refused to invest in the arms industry. More recently, US citizens opposed to the military action in Vietnam invested in the world’s first modern ethical fund, the Pax Fund.

The UK’s first ethical fund was launched in 1984 by Friends Provident. In the City it was dubbed ‘the Brazil fund’, as they thought the idea was nuts. But since then the ethical landscape has changed considerably. There’s now around £8 billion invested in almost 100 ethical funds – a decade ago there were just a couple of dozen.
Q:
What is an ethical fund?
A:
Ethical funds pool together the money of hundreds of investors into a single fund, which in turn invests in the stock market. The choice of investments is influenced by a range of different social, environmental and other ethical factors.

Most of us approach ethical investment having identified a specific financial need – perhaps you have spare money and want to invest it for the future or you may want to save to buy a house. It is common for ethical funds to be linked to certain savings vehicles e.g. a personal pension, ISA or a monthly savings plan.

The number of ethical investment options is growing all the time. So chances are, there will be an ethical fund available that matches both your financial and ethical needs.
Q:
How does ethical investment work?
A:
Approaches to ethical investment vary according to different ethical investment strategies. The three main ones that are generally talked about are screening, preference (or ‘best in class’) and engagement. These strategies can be used in combination as well as on their own.
- Screening is where companies are excluded or included because of their involvement in certain activities. Examples of negatively screened practices are those engaged in heavy pollution, arms dealing and animal testing. Positive practices often include companies providing waste and recycling services, or promoting fair trade and organic farming.
- The preference or ‘best in class’ approach applies social, environmental and ethical guidelines to select the best companies in that sector. For example, an ethical fund might have criteria that enables it to invest in the oil and gas sector, but will only invest in those oil companies which are the best, ie the ones with a better record on the environment and human rights than others in their sector.
- The third approach - engagement - invests according to regular financial criteria but presses companies to improve their social and environmental practices. This can involve meetings with senior management and voting at relevant annual general meetings. Many of the larger ethical pension funds tend to concentrate solely on engagement, while retail funds can combine all of the above methods.
Q:
Do any funds invest in green companies such as renewable energy?
A:
There are plenty of green investment funds. Some invest in companies which show a commitment to protecting the environment and have the potential to tackle global issues while generating a healthy return.
Q:
What about their financial performance?
A:
There’s growing evidence to suggest that ethical funds perform just as well as their non-ethical peers – if not better. But like any fund, performance varies so it’s always a good idea to speak to a financial adviser before taking the plunge. And remember the old adage that past financial performance is not necessarily indicative of future performance.