Financial Mortgage Advice

How to Invest Ethically

Leaf Financial Advisers Ltd. - Independent Financial Advisers from Bristol

The question of how to invest ethically starts with your own personal definition of “ethical”.  Everyone’s values are different, and the extent to how you view and weight the importance of individual issues will create your own personal view of ethical investing.

We will quickly run through the main approaches to ethical investing;

  • Positive/negative screening – Two broad ways of approaching how you filter companies to invest in.  Negative is viewed as more efficient and involves excluding from your consideration any companies that don’t agree wth your views, e.g. excluding all tobacco companies.  positive screening involves the active choice of companies that agree with you view, much more difficult and time consuming but may resulting ina  beter match in terms of ethical alignment (though may also involve a negative impact on investment performance) 
  • Green Investment – 

What is ethical investing?

Ethical investing is the act of filtering investment securities based on one’s moral or ethical principles. The investor’s principles shape ethical investing. The investor, and nobody else, defines the most ethical companies to invest in.

Ethical investing bears many different names, among which are impact investing, socially responsible investing, green investing as well as environmental, social and governance (ESG) investing. All are focused on aligning investments with certain ethical principles. ESG investing for example avoids investments that pose ESG risks such as climate change, reduced respect for human rights, non-compliance to regulations, bribery and corruption etc.

Due to differences in moral principles, one investment-management company’s portfolio may contain ethical investment funds that are quite different from another’s. In essence, what one company or portfolio manager considers as ethical stocks to invest in may be different from what another portfolio manager regards as ethical stocks. As such, ethical investing has no certification or recognised standards; it’s more of a personalised investment approach.

aving for the future is important, and so is staying true to your values.

Wealthify has joined forces with best-in-class ethical fund providers to create a range of five Ethical Plans that let you invest in organisations committed to having a positive impact on society and the environment.

All our fund providers are signatories of the Principles of Responsible Investing (PRI), the world’s leading proponent of responsible investing. They actively-manage their ethical funds, keeping a close eye on the organisations in which they invest, and employing rigorous ongoing screening to ensure that ethical standards are maintained.

So now you can do your bit for the future and give your money a chance to grow.

Ethical investing is an investment strategy where the investor’s ethical values (moral, religious, social) are the primary objective, along with good returns. With suspicious and illegal investment deals on the rise, many investors are starting to insist that companies they invest in are socially responsible. This means treating their employees with respect, creating healthy products, and services and keeping away from unethical business practices.

Why Invest Ethically?

Ethical investing is a way to grow your savings without compromising on your values. As with all investing, it involves risks. Traditionally, ethical investment products, such as funds, enabled you to avoid investing in companies or sectors you disagree with. This is known as divestment. Cutting out sectors can increase the risk that you’ll miss out on growth and opportunities. On the other hand, if your portfolio excludes, say, oil and the oil price falls, your portfolio is less likely to be affected. Proponents of environmental, social and governance (ESG) investing, a type of ethical investing, claim that the extra analysis involved means you end up with better-managed companies. You could also argue that taking into account societal shifts, such as growing concern about climate change, will give you exposure to growing industries and new technology, such as renewable energy. Each company may have its own formula to measure ESG scores, but we’ve outlined what they could factor in below.

Read more: – Which?

Select the right funds

Investing directly into individual shares is not usually an advisable investment strategy, unless there are particular extenuating circumstances (such as investing via an employee scheme or if you have a particular knowledge of the industry or business).  Usually it is good practice to invest via funds, where investors pool their money to buy a basket of shares and so spreading the risk across a larger number of companies. 

Ethical funds operate by only selecting companies that meet their criteria and excluding ones that don’t.  The objective will still be to pick companies that will perform well, but by excluding ones that do not meet the criteria set by the fund.

Not only are there many different types of ethical funds, from focusing on green energy development to corporate social responsibility, but there is a range of ways in which they determine what to include and exclude.  The oil multinationals Shell and BP have appeared in ethical fund due to them spending some of their resources n developing renewable energy and the worlds second largest miner, BHP Billiton, also appears in many ethical funds as it is deemed to have a high enough level of corporate social responsibility.

As you can see funds are a great way to get exposure to a wide variety of ethical companies that you want to help support with your pension money, but you also have to be careful to check what they are investing in, as you may be surprised what they deem ethical.

Benefits of ethical investing

The belief that considering environmental, social and governance factors will detract from potential long-term investment performance can hold people back from investing responsibly. It shouldn’t.

If you think the most successful investing strategies are those that pay little heed to the planet and its people, think again.

We commissioned consumer research which found that 57% of clients would be willing to invest ethically at the expense of investment growth. But this doesn’t need to be the case. View our Wealth Unlocked Report here.

The view that you must expect lower financial returns if you want to invest responsibly probably stems from old debates around so-called ‘ethical’ investing.

But ethical approaches – which tend to focus more on moral judgements – are very different from responsible investment strategies that integrate environmental, social and governance (ESG) factors to improve investment decisions, and so financial outcomes.

Research on ESG and performance
There have been many studies examining the relationship between the integration of ESG into investment strategies and financial performance.

In a recent 2021 study, researchers at the NYU Stern Center for Sustainable Business looked at the conclusions of more than a thousand research papers on the topic that were published between 2015 and 2020.

They found that few studies (14%) found a negative relationship between ESG integration and the financial performance of investment strategies. On the other hand, most (59%) showed either similar or better performance relative to conventional investment approaches.

The NYU study also highlighted research indicating the greater resilience of ESG-focused funds during crises. It cited the performance of the FTSE4Good set of ESG stockmarket indices, for example, which were found in a 2017 study to have lost less ground – and recovered more quickly – after the 2008 global financial crisis than their conventional counterparts.

The value of any investment and any income taken from it can go down as well as up so your customer might not get back the amount they put in.

We can’t predict the future. Past performance isn’t a guide to future performance.

The logic of ESG investing
These findings should not come as a surprise. After all, why should investment strategies that disregard ESG factors perform better over the long run than those that take them into full account?

By integrating ESG issues in their analysis and decisions, investment managers can paint a more complete picture of what is driving the risks and potential returns of the assets in their portfolio. Looking at a company’s financials in isolation can only tell you so much.

It is true that over the short term, at least, a company may get away with profiting at the expense of the environment or society. Eventually, though, it will probably end up landing the company in hot water, with damaging regulatory and reputational costs borne by its investors.

Active investors can engage with the companies they invest in to encourage greater consideration of the environment or society, or to push for improved governance, where they believe it will improve investment outcomes. Such engagement is a pillar of many active ESG investment strategies.

The prospects of future growth
There is widespread recognition of the urgent need to address the world’s most pressing challenges, from access to healthcare to combatting climate change. Indeed, almost two-thirds of people surveyed worldwide by the United Nations believe climate change is a global emergency.

Addressing the climate crisis and other global challenges demands that we change the way we do things. The need to lower global emissions means heavily polluting industries and companies face the risk of being regulated out of existence. Some businesses also face physical risks from climate change, such as rising sea levels.

Looking at assets through an ESG lens can help identify those with more positive long-term prospects. Rather than dismissing certain sectors entirely, ESG strategies can distinguish between companies that have robust plans to transition and those that do not.

Companies that are improving their ESG credentials appear more likely to benefit from a structural shift towards a more sustainable economy. After all, we believe many promising investment opportunities over the coming decades look set to come from solving the world’s challenges.

The pursuit of your clients goals – and values
You can now look to help achieve your clients own long-term investment goals without it being at the expense of the planet or its people. There are a growing number of strategies, each with their own targets and approach, to choose from.

However they choose to invest, your clients shouldn’t be swayed by the myth that paying heed to the environment and society will leave them worse off. In our opinion, underperformance fears should not dissuade from putting investments to work responsibly.





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