Is ethical investing really possible?

What does ‘ethical’ mean to you? The term is certainly a subjective one. For many, acting ethically means to avoid practices deemed as unacceptable, while for others, it involves proactively contributing to society and the environment.

Ethical investing may seem complicated and ambiguous, but essentially, it means that you understand what your money is funding and feel confident that this is in line with your principles.

You may have heard the term ‘sustainable investment’ or ‘socially responsible investment’ (SRI); this process incorporates environmental and social factors when selecting investments. The criteria used by different ethical funds to determine where money will be invested varies significantly, but there are two methods commonly used to identify positive investments:

Negative screening

Avoids investing in industries which have a negative impact on society and the environment. For example, a fund that is negatively screened will exclude things such as tobacco and arms.

Positive screening

Proactively searches for investments that make a worthwhile contribution to society and the environment. For example, a positively screened fund may include companies that produce clean energy.

While ethical investing can provide comfort that your money is not being used in ways you wouldn’t approve of, there is much debate about whether it’s able to reap the same rewards as investing in, say, oil or tobacco. When it comes to profitability, the same rule applies as to any other style of fund: there are good performers and there are bad performers and when compared with more conventional funds, the good performers in the ethical arena hold their own.

Some investors may have very strict ethical criteria they wish to meet; a company that is considered ethical to one investor may be viewed differently by another. For instance, in light of the recent Cambridge Analytica scandal, some people may regard Facebook as an unethical organisation, although this won’t be the case for all.

A portfolio that meets strict or bespoke ethical criteria or carries out positive screening will often require an ethical specialist. At AFH, we can offer a mix of both negative and socially responsible screening through third-party managed SRI funds for clients interested in ethical investing; these funds will avoid investing in companies deemed to have a harmful effect on society or the environment, in addition to the objective of achieving a competitive financial return. 

If you would like to find out more about our approach to socially responsible investing, please do not hesitate to get in touch and speak with an independent financial adviser.

This is for generic information only and is not suggesting a suitable investment strategy for you. You should seek independent financial advice that takes your individual circumstances into account prior to proceeding with any course of action.

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