17 August 2012 12:00

Ethical Investing - an Introduction

Ethics Big
Ethical investments are so called because they balance the regard for a return on investment with the moral activities of a firm. These types of investments are described in Business Ethics: a European Review as "a set of approaches which include social or ethical goals or constraints as well as more conventional financial criteria in decisions over whether to acquire, hold or dispose of a particular investment".  This means the investor is not only thinking about how much money they will make, but also considering the social and environment benefits that could be produced.  Modern Wealth Management recently wrote an introduction to ethical investing, and explained some of the key things to know if you are considering it.

Is Ethical Investing Right for You?

Socially-minded investments ensure that social and environmental returns are one of the priorities without compromising on profitability. They are also intended to support businesses that meet the investors own personal moral or ethical views.

The IMA, the trade body for funds, defines ethical funds as those that exclude investment in any companies that can cause damage to the environment, health or human rights. Some funds employ positive screening, which means favouring stocks that are connected to desirable causes such as community projects, welfare, the environment and the healthcare sector. Others use negative screening to filter out industries which are viewed as harmful, including so-called 'vice funds' such as gambling and tobacco.

If they so wish, investors can also take an ethical approach by selecting a financial product from an ethical bank like the Co-operative Bank or Triodos, where the money will be invested in social and community projects.

Reasons for Growth of Interest in Ethical Investing

There is evidence that suggests recent misdemeanours in the financial sector, such as the rate rigging scandal from Barclays Bank, has resulted in an increase of interest in ethical funds. Triodos Bank, which provides around 40,000 ethical accounts in the UK, saw a 51 per cent increase in account applications, and opened three times more accounts than average the day before Barclays boss Bob Diamond resigned.

Charles Middleton, Triodos UK managing director, believes that all of this new interest in ethical options could possibly change the financial sector at a fundamental level -

"If people moved their savings away from banks who say very little about what happens to their money once invested, to banks that in fact do the opposite and make a virtue of telling depositors how their savings are being used, UK banks would have to sit up and take notice," he said. 

Ethical Investment Challenges

The fact remains that like any financial decision, there are things to take into consideration before you make your ethical investment. There is currently no industry standard definition of what makes an ethical fund, and investors may have different standards when it comes to the environment and other factors.
Because of this, it's always best to do some research into a fund and ensure it meets all of your ethical requirements. Ethical funds can also often be quite expensive due to their complexity, as they require more analysis, and there is of course no guarantee it will perform as well as its rivals.

Where to Start

It is important when startijg out in ethical investment to strike the correct balance between principles and profit. It would be wise to choose an ethical fund after lookign at its history and long-term track record. Even after the initial investment, you should monitor it to ensure it keeps in line with your ethical beliefs and is performing well enough to support a financially stable future.

If they haven't already, investors should start to consider ethical investments. In a recent report by Blue and Green Tomorrow, Kirsty Jenkinson of the World Resources Institute noted that leading international companies across diverse sectors are "investing heavily" in sustainable products and services.

"Leading companies are demonstrating a growing belief that their future profit and growth will be tied to how effectively they respond to looming global challenges including resource scarcity, population growth, and climate change," she said.

 

 

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