Can Ethical Investing Harm Your Wealth?

Lena Semaan examines the potential for financially and mentally rewarding investments.

With the promise of healthy returns and a clear conscience to boot, socially responsible investing is an appealing proposition. Against a background of heightened global awareness of issues such as climate change, ethical investments have shed their alternative hippie image and embedded themselves firmly in the mainstream.

Unfortunately this hasn’t necessarily led to greater clarity for the consumer – if there was any to begin with. The idea of putting the words “ethical” and “investment” in the same sentence would have been almost unthinkable 20 years ago and for many looking to invest it can still be both confusing and off-putting. Recognising this, many “ethical” funds have since been rebranded as the less value-laden “socially responsible investments”, or SRIs.

The reasons for this are logical enough. For one thing, while it would be delightful to bask in the notion of universal ethics for all, the fact is that one man’s tobacco farm employment scheme is another’s Death Valley. Moreover, a change in life circumstances can alter our viewpoint on what is or isn’t ethical. Take drug testing on animals, for example: you might have been vehemently opposed to it at one time, but later medical breakthroughs might have led you to change your opinion.

If you’re considering taking up the mantle of the socially responsible investor it’s worth remembering that there are no perfect companies. Even if a fund makes it through the screening process for being environmentally responsible, it may yet violate the principles of moral responsibility. For instance, a company that receives the all-clear on gambling and pornography might fall out of favour because of its military connections. Of course, there will also be people who happily argue that to create a free world in which good things can happen strong military systems are necessary.

The problem is that it can be difficult for potential investors to see the environmentally sustainable wood for the trees. First, you have to comb through the fine print in the marketing documents to figure out whether the companies really do believe what they profess. Then you have to look at the numbers and decide whether the projected returns are worth putting your faith in. But investing responsibly means just that.

To help distinguish between SRI funds, industry players talk in terms of “dark green”, “medium green” and “pale green” funds. The theory is that the darker the green, the more likely it is that the fund will differ substantially from mainstream share funds. Dark green funds actively seek to invest in industries that input positively into society, such as renewable energy, or water and waste management. Medium green funds are often simply about avoiding contentious industries such as gaming, tobacco or uranium mining. And pale green funds are generally those that select companies that are less bad than their competitors.

The approach most widely used by investment funds tends to be ‘’best of sector’’ or ‘’sustainable’’ investing. The fund manager selects companies with the best environmental and social records of all available funds. When it comes to commercial pressures to produce strong returns, SRI fund managers are in the same boat as any other fund manager.

This isn’t necessarily a violation of their remit: while you may not like the way a supermarket group sources its food, you might acknowledge that its work practices and treatment of employees are both sustainable and sound. In the US, stocks of publicly traded companies that make Fortune’s list of the “100 Best Companies to Work For” also tend to perform exceptionally well. On the face of it such companies might not produce “ethical” goods or services; however, treating millions of workers well is regarded as a major plus point these days.

For most people, the necessity of having a fund manager do the work for them means probably having to accept investing in companies that don’t actively harm, rather than in companies that proactively do some good. However, for the diligent investor who has the time and inclination to do his or her own research, there are plenty of dark green options out there that also provide excellent returns. While we’re not in the business of recommending, a good starting point is to look at clean technology, healthcare, efficient transport, recycling and waste management.

And then there’s the all-important bottom line. Investment returns enjoyed by SRIs in recent years have helped to shatter any lingering view of socially responsible investing as a compromise, where you get to feel good despite the numbers not being so great. Instead, SRIs have shown they can equal and even outperform traditional investment funds.

Ultimately, SRIs are part of the money market. This means that if things generally are bad, SRIs too will perform poorly, as happened with the credit crunch of 2008. It also means that the same caveats apply to SRIs as to any other sort of investment: spread your risk; understand what you’re investing in; balance your portfolio; and decide whether you want growth or income.

Given the multi-layered nature of SRIs it’s possible to be as committed or as casual as you wish. As to whether any one SRI is better than another, as with ethics themselves, the decision is a highly individual one, based both on your own values and on your hard-nosed expectations of what an investment should deliver.