What is ethical investment?
Over £11 billion of private investors’ money is tied up in ethical investments. The latest instalment of our “What is…” series sets out to define an ever-growing sector that recognises the value of people in acquiring prosperity.
To borrow the slogan of National Ethical Investment Week, ethical investment allows individuals to “Make money and make a difference”. In a financial world ruled by corporate superpowers, it is a philosophy that is becoming ever-more precious.
Conventional investment benefits from a feeling of detachment; in many cases, investors aren’t fully aware of exactly what kind of companies or sectors their investment is helping to fund. Often, this means that investments, while potentially lucrative, tend not to marry well with personal beliefs or morals.
This Business Dictionary definition of ethical investment backs up this claim: “[Ethical investment is an] investment philosophy which attempts to balance the regard for morality of a firm’s activities and regard for return on investment.
“Ethical investors seek to invest (usually through mutual funds or unit trusts) in firms which make a positive contribution to the quality of environment and quality of life.”
In essence, ethical investment allows morality to play a part in the process by screening out unethical sectors (negative screening) or screening in ethical sectors (positive screening).
In positive screening, ethical investment look to back companies or sectors that are tackling key sustainability challenges, for example, climate change, resource scarcity, pollution. Negative screening, which is the crux of ethical investment, excludes those that are damaging the planet, its people or society as a whole.
The term ‘sextet of sin’ is common in the ethical investment space. It refers to a group of six sectors that are traditionally thought of as the most unethical— alcohol, tobacco, pornography, gambling, armaments, and nuclear energy—subsequently, they are the ones most commonly avoided by ethical investment strategies.
That said, research is always important when considering ethical funds—there is no universal rule, and some may better fit your own moral position than others.
In the past six months or so, B> has interviewed many of the country’s leading ethical financial advisers, as well as fund managers from some of the UK’s top ethical funds.
Jeremy Newbegin, director at The Ethical Partnership told us that if people do not invest ethically, “it may well bring about economic disaster”, whilst Christian Thal-Jantzen of Bromige said widespread ethical investment could change the world “dramatically”.
From a fund perpective, Audrey Ryan, fund manager at Kames Capital, said that despite the huge misconception surrounding the sector, “There is no long term performance penalty for investing ethically”.
Our recent in-depth report, The Guide to Sustainable Investment, is a one-stop shop that contains all the information you will need to become an ethical investor.
As always, we encourage you to seek professional advice before making any commitments. Speak to your own IFA, if you’re confident they can help, or fill in our online form and we’ll put you in touch with a specialist ethical adviser.
Previous instalments in the “What is…” series:
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