Investing ethically isn’t always straightforward but there are ways to reap rewards with a clear conscience, says John Stepek.
The idea of ethical investing has been around for a long time. As the name suggests, it involves investing in companies whose activities and ways of doing business don’t clash with your values. An obvious example is tobacco companies – many people prefer not to invest in them because their products kill while delivering no obvious social benefit.
Most of us would rather our money goes towards financing companies who do good, or at least don’t do evil. Why would you attend a rally against climate change and then stuff your pension pot with the shares of oil giants, for example? Still, investing ethically can be harder than it looks, so here are some ideas on how to go about it.
Let’s get one misconception out of the way first – you certainly don’t have to sacrifice returns to invest ethically. Most data suggests that there’s not a huge difference in the long run between the return on socially responsible investing, and the wider market – or, at least, you can massage the figures to make them tell whichever story you’d rather tell.
The real problem with ethical investing is that you’ll have to put more effort into it if you’re serious about it. Here’s why. First, lots of fund managers now operate in this area. The jargon has moved on somewhat – rather than “ethical”, the current buzz acronym is ESG (environmental, social and governance) investing. Other terms are often used interchangeably (such as SRI – socially responsible investing). Whatever the label, each of these funds may operate differently.
It’s worth understanding the background to this. The active fund management industry (where a manager takes clients’ money, and “actively” tries to beat the wider market by picking and choosing stocks) is being taken to the cleaners by the passive industry (where your money is invested in a fund that uses an algorithm to track the market, rather than trying to beat it). Passive funds are cheaper, and on average outperform their active rivals.
So active managers – unable to point to outperformance as a reason for you to hand your money over – are finding other ways to differentiate themselves from passive funds. ESG is one way to do this. In short, there’s a marketing-led reason behind the rise in socially responsible investing, and it’s not always one that has the best interests or concerns of you – the ultimate investor – topmost in mind.
The other problem to watch out for is that ethical investing is a magnet for scam artists, or for unregulated blue-sky projects that might as well be scams. Ignore any emails or cold calls you get trying to sell you on “community” projects in distant lands. When I started out writing about this stuff, bamboo plantations were all the rage. These days, it’s cannabis farms. They use the “ethical” angle as just another sales tool, so steer well clear.
WHERE TO START
When it comes to funds, for all the jargon, there are really only two main ethical styles. One style simply refuses to invest in certain businesses – oil, for example. The other prefers to “engage” with managements to push them to clean up their acts. So this type of fund might buy an oil company, but put pressure on the board to invest in electric charging points, for example.
If you want to find a fund that fits with your values, you first have to decide what those are. Do you just want to avoid tobacco stocks? Or do you want to support renewable energy investment? If it’s the former, you can get away with something simple – Legal and General offers a fund that tracks the performance of the FTSE All-Share, excluding tobacco stocks. If it’s the latter, you might be better with an actively managed trust or fund.
As with any investment, you should check past performance. But you also need to check the “engagement” track record. Do the fund managers do what they say they will? Do they challenge company policies? Do they stand up to exorbitant executive pay? Or do they use “ESG” as a sales tool?
There is a useful directory for ethical investing on Good-with-money.com. The website awards a “Good Egg” to organisations that it considers to have sound policies on environment and social issues, alongside a good attitude towards customers.
It is by no means comprehensive, but it’s a good starting point, covering everything from personal finance (current accounts) to utility providers (green energy suppliers) to niche investments (lending money to fund renewable energy projects).
John Stepek is executive editor of Moneyweek magazine
