A guide to ethical investing
By Kate Saines
When deciding where to invest our money, our biggest priority is naturally finding a product which provides the highest returns.
But for a growing number of investors, knowing the money is going to be beneficial to not only the company whose shares we are buying but to the sustainability of the planet is just as essential.
With household spending on ethical goods and services tripling in the past ten years, according to the Co-operative Bank, it will come as no surprise to hear that sales of ethical funds are now rising too.
So, if you are keen to invest some money but you want to do so responsibly here's our guide to ethical investments.
What are ethical investments?
Put very simply, they are financial products which aim to provide returns to customers through investing in companies which benefit society or the environment in a positive or sustainable way.
This could be though socially responsible practices or adopting 'green' business methods, for example, or they could simply be manufacturing a green or ethical product – like wind turbines or fair-trade goods.
The most common ethical investment vehicles are funds. Some funds are more 'green' than others. Some are heavily screened by the fund managers who run them and will completely avoid investing in companies which are involved or connected with alcohol, tobacco, arms, gambling or pornographic material.
However, some fund managers might decided to choose less vigorous screening methods, if for example they feel they cannot avoid including an oil company, for example. In which case they will choose the company with the most green practices.
Ethical investing is also known as socially responsible investing or socially conscious investing.
Why invest ethically?
Many people choose ethical investing because they want to use their money to make a positive difference. It's all about having a social conscience and helping to boost those companies and industries which are benefiting society and the planet in the long term.
The impact of the credit crunch and recession has made people start to question their motives when making money, say experts, bringing ethical investing to the forefront.
Penny Shepherd, chief executive of UKSIF, the sustainable investment and finance association, said: "Recent environmental and economic crises have made people think more carefully about the long term impacts of their financial decisions.
"After a decade that almost ended in global financial meltdown, attitudes are changing from greed is good to green is good – less Gekko more Eco."
Ms Shepherd predicts the 2010s will become the decade of financial responsibility and that more people will, over the next ten years, consider how they can make a difference with their money.
Read more: Alternative investments: What are the best options?
Who invests ethically?
According to YouGov eight per cent of savers and investors have green or ethical products, while 37 per cent want to invest in them in the future.
Meanwhile a large number of people - 43 per cent - do not realise there are green and ethical options when it comes mortgages, pensions and ISAs as well as funds.
These figures, released as part of National Ethical Investment Week back in November 2010, also reveal that it's the over-35s, as opposed to younger adults, who are more concerned about sustainability.
Well over half of 35 to 54 year olds want to make money and make a positive difference compared to 33 per cent of 18 to 24 year olds.
How do you invest ethically?
As we've already mentioned, the most common way to invest ethically is by putting money into an ethical investment fund – and there are plenty to choose from.
There are, according to EIRIS, which provides research into the ethical performance of companies, around 100 UK retail green and ethical investment funds available.
At the end of 2010 it said approximately £9.5 billion was invested in UK retail ethical funds. Meanwhile the Investment Management Association (IMA) figures show net retail sales of ethical funds totalled £98 million by the middle of 2010.
Two of the most prominent players in the ethical investment field are The Co-operative and Ecclesiastical Investment Management.
Both run a selection of products including funds which are ethical.
The Co-op is well known for its clear ethical policy, which runs through all its products – right through to its supermarkets.
Its funds focus on eight themes including healthcare, climate change, global power shortage, urban regeneration and sustainability.
This means fund managers buy shares from companies involved in these types of business. And by investing in these funds investors are supporting the growth of these businesses.
To invest in these funds or any others the first step should be to speak to an independent financial adviser (IFA). There are many which focus specifically on ethical investments so it's worth doing some research to find an expert.
Apparently well over 80 per cent of financial advisers provide advice on green and ethical investments – so it should not be too difficult to track one down.
But you can also invest ethically though ISAs and savings products. Charity Bank has launched a new Cash ISA, offering customers an interest rate of 2.5 per cent.
A deposit of £250 is needed to open the ISA, but this is then lent to support a wide range of organisations providing education and training, arts and heritage, community regeneration, social care, health and housing as well as international and sustainable development.
Geoff Burnand, chief investment officer of Charity Bank, said: "People who invest in a Charity Bank ISA can be assured that they will not only be receiving competitive rates, but their money is making a measurable social impact."
How well do ethical funds perform?
There is a belief that financial products which are ethical don't perform as well as mainstream funds. This is not necessarily true and the figures speak for themselves.
A survey in October 2009 revealed 90 per cent of wealth managers' responsible investment portfolios performed the same or better than other investments.
Sue Round, head of investments at Ecclesiastical Investment Management, said there was an outdated premise that investment in ethically screened funds lead to lower returns.
"The reality is that ethical funds can perform very highly and compete for the top spots in fund ranking tables overall," she said.
What to watch out for
Don't confuse ethical funds with green funds, or climate change funds for that matter. Danny Cox of IFAs Hargreaves Lansdown said: "Climate change funds aren't green. A climate change fund is likely to invest in a range of themes from solar and wind power to agricultural and hybrid cars.
"Green funds differ from a themed fund such as this as they adopt both positive and negative screening to ensure their ethical status."
As we've already mentioned, there are varying levels of ethical or green investing, and these may or may not suit your values. Derek Capelin of Capelin Financial Management said you must be clear on your objectives and be prepared when seeing an adviser to articulate your likes and dislikes.
And Ashley Clark of Need An Adviser.com said: "There are many shades of green. Having 'ethical' or 'green' in the title may mean very little. Be mindful of so called light green funds when compared to dark green funds."
He explained that while dark green funds have high levels of screening, with unethical areas totally excluded lighter green funds will simply select the best of a bad bunch of companies by choosing, for example, the most green of a batch of oil companies.
Finally Gordon Bowden, of Quainton Hills Financial Planning, reminded potential ethical investors that the normal rules of investing still apply in the ethical market.
He pointed out that most ethical investments can be held within an ISA wrapper. Up to £10,200 can be sheltered from Capital Gains and Income Tax and most ethical investments can be held within a Self Invested Personal Pension (Sipp).
"Many ethical funds invest in the same companies so check that your combined holdings are suitably diversified," he said.
"Finally remember that you are investing for a reason – performance matters."
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