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Ethical Investing: What It Is, Why It Matters, and How You Can Get Started

Ethical investing is growing in popularity and this article will help explain what ethical investing is and if it’s right for you.

Leaf Financial Advisers Ltd. - Ethical Pension and Investment Advisors

What is ethical investing?

Ethical investing is an investment strategy that takes into account environmental, social, and governance (“ESG”) factors alongside generating long-term returns for investors. This generally means investing in businesses that prioritize sustainable and ethical practices.  Ethical investing has become increasingly popular in recent years as more people seek out ways to make a positive impact on the world, and realise that they can do so through their investments. With ethical investing, not only can investors do good for the world, but they also have a chance of making a financial return whilst doing so. In this article, we’ll explain what ethical investing is, why it’s important, who can do it, and what the next steps are.

Please let us know if you’d like to learn more about how ethical investing works, how you can ethically invest with your pension, or anything else; we are independent financial advisers who are always happy to talk about ethical investing.

How does Ethical Investing work?

Ethical investing is focusing on investing in companies that are dedicated to a socially responsible, environmentally friendly and ethical approach. This means filtering your investment search for companies that have a commitment to sustainability, corporate governance, and community involvement or other ethical considerations.

Rather than making investments solely based on financial gain, ethical investors evaluate potential investments based on how they line up with their own values and beliefs. They may also factor in any extra social or environmental benefit that their investment could bring.

Ethical investments can be made in stocks, bonds, or funds and this can include the investments made in your pension and ISA, making it possible for people to combine their financial and retirement goals with their moral values. Ethical pensions allow you to ensure your hard-earned money is put to use in a way that matches your ethical values over what can be a long time scale.

It would be sensible to get advice from a financial adviser if you are considering ethical investing. They can help you decide which ethical investments are best suited to your needs and risk profile.

Why Does Ethical Investing Matter?

Ethical investing is a way to make an impact with your investments and is often overlooked by many people who are unaware of the possibilities and benefits. As ethical investing increasingly gains popularity, it’s becoming more important for people to understand why it matters.

First and foremost, ethical investing helps to support organizations and businesses that are working to improve our world. This could include companies that focus on renewable energy, animal welfare, healthcare, sustainability, or education. Investing ethically allows you to direct your money toward the causes and organizations you believe in and want to support.

Secondly, as you are able to select the companies (or funds containing many companies) that you invest in, you are able to focus on your own particular views on what ethical is. Ethical investing is often referred to as ESG investing, which involves taking into consideration the environmental, social, and governance (ESG) factors of a potential investment, instead of only looking at financial returns. However, within this rather broad definition, there are areas that you may be more focused on, such as green energy, which you can focus your investments into.

Thirdly, there is the potential for ethical investing to help protect investors from risks. Companies that fail to consider ESG factors often face reputational damage, costly litigation, and government regulation. By considering these factors before investing, some consider the investment risk to therefore be lower, as you are focusing more on the long-term nature of the company. Whilst this may be true, it is unproven and should be considered alongside other views on risk as you choose where to invest.

Finally, ethical investing can be a great way to start a conversation with a financial adviser about investing, pensions or more generally planning and saving for your retirement. Many financial advisers now specialise in ethical investments and can help you create an investment portfolio that aligns with your values and goals. By having an open dialogue with your financial adviser about ethical investing, you can ensure that your investments are doing more than just making money as well as undertaking a general financial review which may have more benefits outside of ethical investing.

How much does ethical investing cost?

Ethical investing can be done in different ways and the cost associated with it will depend on which option you choose. Generally speaking, ethical investing is not more expensive than traditional investing, but the costs involved can vary. If you are using a financial adviser, they will likely charge a fee for their services. This fee could be a percentage of the money you invest, or it could be a one-time fee. Make sure to ask about fees upfront and find out exactly what you will be charged for and ensure that they are transparent and open about their costs.

There will be costs associated with ethical investing, such as a management fee for the pension or ISA provider and fund manager charges if you invest via investment funds and these are usually very similar to as if you were investing in a non-ethical manner. A financial adviser should be able to run you through the options and explain the potential difference in costs between for example, an ethical investment portfolio and an equivalent one that is not.

Why is ethical investing important?

Ethical investing is becoming increasingly popular for many reasons. It offers investors the opportunity to align their investments with their values and have a positive impact on the environment, society, and the economy. By investing ethically, individuals can use their financial resources to support companies that are making a positive difference in the world. This type of investment strategy is not only beneficial for the world around us, but can also be financially and emotionally rewarding.

Ethical investing is important in this regard as it allows investors to make informed decisions about where they put their money and enables them (sometimes with the help of a financial adviser) to make sure their investments align with their values and beliefs, while also helping to create a better future for all. Investing ethically can also allow investors to diversify their portfolios and potentially increase their returns over time. Ethical investing and ethical pensions are becoming increasingly popular, allowing investors to secure their retirement funds without compromising their values, and more accessible as ethical investing becomes more mainstream.

How to choose an ethical fund

An “investment fund” is a very popular way of investing and it involves purchasing a small share of a large investment fund which itself is invested in several (possibly hundreds or thousands) of different companies. Investing via a fund in this manner allows you to diversify across a large number of companies without the cost or difficulty of purchasing and managing the shares individually. There are thousands of these “pooled investment funds” on the market and more than two hundred of them in the UK carry the name ‘ethical’ or ‘sustainable’.

When considering a fund to invest in there are some questions that should be asked:

  • What is its ethical policy – to make sure it aligns with your ethical views.
  • What are the funds charges – both initial charges and ongoing charges can vary and should be understood.
  • How has the fund performed – past performance is not an indication of future performance, but it can be part of a wider selection process.
  • Is the fund actively managed – actively picking stocks is one way of running a fund, whereas some take a more passive approach and follow an ethical index.

This is not an exhaustive list, just some suggestions to help with selecting an ethical fund.

Care must be taken to avoid “Greenwashing”, where a fund or a company uses an ethical or sustainable claim to make it seem greener than it actually is.

Ultimately, doing your research and taking a closer look at each fund’s policies and track record will help ensure that your money is invested responsibly and ethically.

What are the next steps?

Once you’ve decided that ethical investing is the right choice for you, there are several steps you can take to get started. Firstly, it is always a good idea to seek the advice of a financial adviser who can help you identify and research potential investments that fit your goals and values.

You should check if you are already invested in an ethical manner through your company’s workplace pension to find out if your plan includes any ethical investments or if they have the option to do so (many workplace pensions have at least some choice of fund types) and what the potential costs are and the details of what the funds are invested in.

Deciding what type of ethical investing you want to focus on is also important. There are many different definitions of what constitutes “ethical” and as yet no standardised definitive meaning. This means you could end up investing in a company that you do not view as ethical (for example, oil and gas majors are contained in many “ethical” funds). This will take some research into funds if you decide to do it alone, or if you are being advised by an IFA then they will be able to help guide you to find the right types of ethical investments.

Final Thoughts on Ethical Investing and Pensions

Ethical investing is an important way for investors to make a difference in the world around them. By investing ethically, individuals can use their financial resources to support companies that are making a positive difference in the world. This type of investment strategy is not only beneficial for the world around us but can also be rewarding for the investor.

No matter what route you decide to take, make sure that you are aware of all the costs associated with your ethical investing journey and that you understand what you are investing in and how they are “ethical”. A financial adviser can help you to understand the fees involved and make sure that you are getting the right deal and investing in the right places.

Ethically Investing through your pension or as standalone investments can be a great way to help the world, please get in touch if you would like to find out more. We are Bristol-based financial advisors and offer a generous free consultation session.

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