Ethical money

More and more people are taking an interest in green and ethical issues according to the Investment Management Association, covering subjects as diverse as environmental improvement, climate change, genetically modified foods, gambling and the destruction of rain forests. Nowadays, you can choose to actively support or avoid these causes through everyday activities such as buying organic food, donating to particular charities or using recycled products. There are also increasing opportunities to make ethical choices when it comes to your finances.

If you are worried that the companies in which you invest might be exploiting Third World countries or damaging the environment, or if you have concerns that you may be supporting company activities that you don’t approve of, you may be interested in ethical investment, also known as Socially Responsible Investment (SRI).

Different people have different principles and not all ethical investment funds have the same objectives. Some look to invest in companies that make a positive contribution, while others specifically avoid certain companies. Ethical investors may avoid companies involved in activities believed to be harmful, such as tobacco production and pornography, whilst others may wish to support companies which make positive contributions to society, by being environmentally friendly for example. There are also ethical investment strategies which try to balance both the avoidance of some activities whilst pro-actively supporting others.

Some ethical funds go further still by using shareholder pressure to bring about changes in company policy. By joining forces with other investors a number of ethical funds have successfully influenced several companies to change their practices.

Ethical investment funds use a screening process to ensure that the companies they invest in are the right ones to meet their ethical policy. The screening will remove companies considered to be ‘negative’ and will encourage investment in ‘positive’ companies.

The type of screening used by the fund manager will be very important to you if you are particularly concerned about certain issues. You may wish to support certain companies that you feel are making a positive effort to be ‘green’ while avoiding those involved in activities that you do not agree with. Positive and negative screening will help you make your investment choice.

Many ethical investment funds will have a panel or committee responsible for setting the criteria and establishing an approved list of companies from which the portfolio manager can select investments. EIRIS, the UK’s leading independent provider of research into the ethical status of companies, also helps ethical funds with the ongoing monitoring of investments.

The first step when choosing an investment is to pick one which is appropriate for your objectives and attitude to risk. Once you have chosen a suitable type of investment you can then select a fund. Ethical investment is about personal choice. Do you want to avoid investing in companies involved in activities you dislike? Or do you want to support firms that have a positive impact on society? Remember some funds will combine both approaches.

Each fund should state clearly its exclusions and inclusions. Remember some funds will be ‘greener’ than others.

As a fund aims to please a lot of people, you may not find one that precisely mirrors your objectives but there should be several that are close.

As with most investment funds, the value of your investment depends on the type of investment fund you choose. Some funds are more risky than others. Ethical funds tend to hold a higher percentage of shares in small to medium sized companies and a smaller percentage in larger companies than their non-ethical equivalents.

Shares in small companies can sometimes be more volatile than those of larger companies. For this reason ethical funds are often perceived as being a riskier investment than their non-ethical counterparts.  However, as with all equity funds, the price of units can go down as well as up and there is always risk in the short term, so you should be looking to invest for the long term, 10 years or more.  Investing ethically does not necessarily lead to poor performance. The performance of ethical funds is just as reliant on good management techniques as that of conventional funds.

Funds with a strict criteria, also known as ‘dark green’, may be limiting their performance. For example, strict ethical screening can exclude whole industry sectors from investment. This can mean that you may miss out on the gains from this sector during periods of high growth. Some funds adopt a ‘best of sector’ or ‘light green’ approach. These funds may invest in larger companies often shunned by traditional ethical funds. This removes some of the risk associated with investing mainly in smaller companies. It is important to achieve a balance between your ethical and investment objectives.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.