When you invest in the stock market, what’s your number one goal? Are you solely focused on profit or would you like to support sustainable and ethical causes too?
Ethical investing is often looked at with suspicion. People assume that investing in sustainable stocks comes at a price. They worry their portfolio won’t perform as well as it would if they bought stocks without considering their impact on the wider world.
It may come as a surprise to some, but ethical investments have actually outperformed traditional investments in recent years. A few factors seem to be responsible for this growth. The investment world has been rife with ESG (Environmental, Social, Governance) marketing; growing concerns have been raised about the future of the planet; and young sustainability-conscious investors are eager to make a change.
Following the COP26 conference, the future looks promising for companies willing to commit to sustainability and the investors eager to back them.
If you’re interested in growing your money while minimising your impact on the environment, read on to find out how to invest ethically.
How to invest ethically
Perhaps the biggest challenge when figuring out how to invest ethically is actually finding ethical stocks and funds. Many investments are given generous ESG ratings but when you drill down and do a little research, you may find that they don’t align with your values.
One reason ESG investing is so complicated is that there aren’t any set rules or regulations outlining what makes something sustainable. It’s up to investors to decide whether a particular company ticks enough of their boxes or not.
While some investors are eager to support companies that leave absolutely no impact on the environment, others simply want to know they’re investing in businesses that are doing their best. Consider what matters most to you and what’s less of a priority, before purchasing any stocks.
Test the water or go ‘all in’
You don’t need to adopt an all-or-nothing approach to ethical investing. In fact, the following terms have been coined to describe the three different types of ethical investor:
Light Green investors are aware of the need for more ethical and sustainable companies and wish to support those willing to commit to change. However, they aren’t tied to ethical companies. Perhaps they want to ‘test the water’ by devoting a percentage of their portfolio to ethical stocks and funds, without worrying too much about the impact of the rest of their assets.
Medium Green investors take things a step further. They’re fairly committed to ESG issues and invest a significant chunk of their portfolio in ethical stocks and funds. Medium Green investors might regularly review their portfolio and make decisions based on new research and data.
Dark Green investors are completely committed to ethical investing and will not support any company that doesn’t totally align with their values. Dark green funds will exclude certain industries such as tobacco, alcohol, oil and gas, weapons and those that test on animals. This type of investing can require a considerable amount of research and knowledge, but there is still potential to make a profit.
The complexity of ethical funds
Investing in funds rather than picking individual stocks can be a smart way to diversify your portfolio and reduce risk, while also relieving you of the burden of having to research and find these companies yourself.
The main types of ethical funds include:
- Socially Responsible Investing Funds (SRI Funds)
- Environmental, Social and Governance Funds (ESG Funds)
- Impact Funds
- Faith-based Funds
However, since ethical boundaries are often blurred and unclear, you may find that some funds include companies you wouldn’t consider ethical if they were presented to you individually.
Take fast-fashion retailer Boohoo for example. The company has repeatedly been accused of poor working practices and low pay, with a Sunday Times investigation claiming garment workers in Leicester were paid less than the minimum wage. Yet MSCI gave the retailer a double-A rating.
This is the second-highest possible rating a company could receive in terms of ESG. With such a rating, Boohoo is in the top 15% when compared to similar retailers.
Beware of greenwashing
With so much pressure for businesses to reduce their carbon footprint, minimise waste and ensure workers overseas are paid a fair wage, some companies have been accused of ‘greenwashing’, aka exaggerating their green credentials to capitalise on growing demand for eco-conscious goods and services.
Some brands, for example, might spend millions promoting recycling initiatives or sustainable materials, while brushing unequal pay and poor working conditions under the carpet.
It’s no wonder so many conscientious investors worry about where their money is being spent. According to research from Quilter, 44% of respondents worry their ESG investments were not what they claimed to be.
Approximately 70% of the UK public want their money to go towards making a positive difference to people or the planet, but the lack of clarity and transparency around how to invest ethically means that many investors are misled.
Ethical investing can be complex, but you don’t need to jump straight in at the deep end. If you’d like help finding appropriate investments for your goals, get in touch with your financial adviser for more information.
This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity.