While the goal of private investment will always ultimately be to increase wealth, the ethical credentials of individual funds are proving decisive for many people looking to grow their fortune.
Broad concerns about the environment and social responsibility are increasingly being considered by investors when it comes to choosing a portfolio – with the impact of their decisions becoming an important consideration besides mere money-making.
Charlene Cranny, communications and campaigns director at the UK Sustainable Investment and Finance Association, says: “Interest in responsible, sustainable and ethical investment is growing fast.
“Young people and women – who are acquiring more wealth all the time – are especially concerned about their impact, but one in two men are as well.
“Alongside that, in the institutional space, pension funds have a legal duty to consider environmental, social and governance – things like executive pay and tax – factors when making investment decisions, because poor scores lead to poor returns for pension savers.”
Here we take a closer look at ethical investment funds – what they are concerned with, different kinds of ethical “scoring” and the returns potential.
What do ethical investment funds take into account?
Just as there is no single way to be ethical, there is also no uniformly correct way to choose an ethical investment strategy.
But broadly speaking, issues surrounding climate change, the arms trade, animal rights, public health, politics, social justice, corporate governance and gender equality all fall under the gaze of ethical investment criteria.
The environmental, social and governance (ESG) measure is perhaps the most widely-known way to take into account the ethical “score” of a financial investment.
Ms Cranny points out, however, that ESG investing should be considered purely as a financial strategy – companies with a high ESG score are less likely to find themselves embroiled in controversy, and are therefore a less risky investment.
Ethical investing constitutes a more “values-based” approach, so each investment made from a strongly ethical standpoint will depend on the individual and what they want their money to achieve.
For instance, they might simply want to avoid investing in a certain business or industry they view as being controversial or harmful – or they may alternatively prefer to invest more proactively in something that will have a tangible impact.
Impact-focused ethical investment funds
Highlighting this distinction between avoidance and proactive ethical investing, EQ Investors communications director Ben Faulkner says: “Ethical investing typically focuses on excluding controversial sectors – for example, tobacco and firearms.
“Impact investing, on the other hand, involves a proactive review of a company’s products, services and business practices to provide a more robust picture of its operations and social, as well as economic, impact.
“We believe a company’s impact is best reflected in its products and services. What does it produce? What does it make? What does it do?
“This is closely linked to the purpose of a company – we are looking to invest in companies that are creating solutions to social and environmental problems and not those that are just trying to minimise their operational footprint.
“We also incorporate ESG screens into our investment process – however, we are strong believers that this approach should only be seen as the first step towards a more sustainable world.
“Investors who really want to make a positive difference should look towards impact investing.”
EQ Investors offers its clients access to a “positive impact portfolio”, which is targeted at exactly these kinds of factors and contains 15 to 20 sustainable and impact funds covering a range of styles, asset classes and fund management groups.
Can ethical investment funds offer a good rate of return?
A common assumption of ethical investment funds is that by compromising on portfolio choices on matters of principle, people lessen their chances of making a good return on their money.
While there may be some truth to the idea that by reducing the options, there is less scope for financial gain, ethical portfolios are increasingly being viewed as effective ways to make a profit.
Since EQ introduced its positive impact portfolios in 2012, they have performed strongly, according to Mr Faulkner.
He says: “The positive impact portfolios have demonstrated that you don’t need to sacrifice returns when you want to do good – and have beaten their performance benchmark each year since inception.
“Rather than hinder, companies making a positive impact should be good for investor returns.”
Ultimately, it is the job of financial advisors to strike a good balance for ethical investors between putting their money in places that tally with their ethical standpoint, while still yielding a profit.
Laith Khalaf, senior analyst at UK financial services company Hargreaves Lansdown, acknowledges this responsibility.
He says: “Ethical managers do have a smaller investable universe, so it’s a more difficult job than traditional fund management.
“Although that doesn’t mean they can’t find profitable companies, and does reduce some risks – for instance the environmental claims we saw engulfing BP after the Deepwater Horizon disaster.
“ESG has climbed up the priority list for many companies and professional investors, though some funds take things a step further by only investing in companies they believe to be ethically sound.”
On the investor side of things, Mr Khalaf stresses the importance of people doing their own research to make sure they are putting their money in places that match their ethical criteria.
He adds: “Ethical investors need to do a bit of homework to make sure their chosen fund meets their own ethical standards, as well as having long term performance potential.
“Ethical investors do need to be prepared for periods of under-performance though, when the areas of the market they aren’t invested in go on a winning streak.”
