Personal finance journalist and author Sarah Pennells looks at planning your ethical investment strategy.
According to the ethical research organisation EIRIS, consumers have invested over £9.5 billion in green and ethical funds; and in a survey carried out for UKSIF (the sustainable investment and finance association) over half of those questioned want to make money and make a difference. But what does this actually mean?
If asked to come up with half a dozen companies you’d be happy to include in an ethical or sustainable fund, what would you say? “A mobile phone company; a gas production and supply company; a supermarket chain; a bank.” Hmm, perhaps not.
But whether you want to invest in an ethical or a sustainable way, or both, you’ll struggle to find a company that totally fits the bill. Even if you track one down, you would be unwise to sink all your savings into it. While most of us are happy to make compromises in our day-to-day lives – we recycle glass and paper, for instance, but choose to drive a car when we could walk or take the bus – we often apply different standards to ethical or green funds. The problem is that, if you want to avoid compromising or taking decisions you’re not 100 percent happy with, you’re likely to be disappointed by many of the ethical funds around.
But that doesn’t mean there aren’t fund managers out there who are genuinely trying to do something different. Even when, in some cases, the make-up of a fund may look similar to nonethical funds, the process of deciding whether or not to invest in it may be very different.
If you’re well-off enough to put into direct investments such as specialist funds, company shares or social businesses, you can set your own rules about where your money goes. But if you’re a novice investor you’re more likely to start with indirect funds such as unit trusts and investment trusts.
Fund managers’ websites carry information about Top 10 holdings etc., but if you want to compare different funds try the yourethicalmoney.org website (an initiative of the EIRIS foundation). As well as doing your own research, talking to a specialist ethical independent financial adviser can be well worth it – as long as you choose carefully. The problem is that virtually anyone can say they advise on green and ethical issues, so go for someone who’s a member of a specialist organisation such as the Ethical Investment Association or UKSIF, or who’s listed on yourethicalmoney.org. These advisers have a track record in ethical finance and should have the expertise you need.
The first step, before you see an adviser or start any research, is to work out what’s important to you; where you’re happy to compromise and where you’ll draw the line. Bear in mind that the more companies you exclude from the range you can invest in, the more risk you’re likely to be exposed to.
If you’re thinking of investing in a fund, aim to find something that’s broadly in line with your ideas. You should feel comfortable enough with what it’s trying to achieve, even with the areas on which you’ll have to agree to disagree.
Questions to consider include:
- What’s important to me? Is my priority avoiding oppressive regimes or companies involved in the arms sector (traditional “ethical” areas), or would I rather capitalise on the potential of the renewable energy and green hi-tech sectors?
- Do I want my money to influence the way companies behave? Some funds actively engage with organisations they invest in, while others simply focus on avoiding specific sectors or companies.
- How much risk am I willing to take? Investing is for the long term, but you still need to be comfortable with short-term volatility.
- How open is the fund management company about what it invests in? Some are better than others at giving investors information, especially about how much say they have in organisations they own shares in.
The key is to look behind the label: don’t assume that funds called “green” or “ethical” are what you’d consider to be green or ethical. Nevertheless, it’s important to realise that, even if such funds don’t live up to your expectations, it doesn’t mean they’re are a waste of time.
Sarah Pennells is the founder of savvywoman.co.uk, a finance website for smart women. Her latest book is Green Money: How to Save and Invest Ethically (A & C Black, 2009).