What is ethical investing?

This is a collaborative post with Aviva.

Picture of green leaves with raindrops for my post on ethical investing

Going green

 

Would you like to improve your finances while improving the world?

This year, I’m pledging to investigate ethical investing. Can I support good causes while still getting good returns? Make a difference for my children’s future?

bang on about investing because many women get a raw deal on the financial front. Gender pay gap. Gender pension gap. Gender investment gap. Net result: Aviva, the insurer, crunched the numbers and reckons the average woman ends up with £106,000 less in her pension. Ouch.

(More on how the gender divide affects your finances 

If we earn less but live longer, we need to make our money work harder so we don’t have to. By talking about money, we can start closing those gaps.

So that’s why I’m delighted to take part in the Aviva #Planuary campaign, and pledge to investigate ethical investing.

Why invest at all? 

Fewer women invest than men, but sticking money in a savings account just isn’t going to cut it. Rubbish interest rates mean your money gets eaten away by inflation.

If you start investing instead, you have the chance to earn higher returns (although there are no guarantees) in exchange for taking more risk.

Michelle Pearce-Burke, founder of online investment website Wealthify, said: “While investments can go down as well as up, evidence shows that in the long-term, money invested in the stock markets outperforms regular savings – you just need to stick with it.”

 

Picture of sunlight through a tree for my post on ethical investing

Shining a light on ethical investing

Why ethical investing?

Many of us also care about where our money goes. Want to make a difference with our wallets, not just our waste bins. Prefer to avoid profiting from harm, from the likes of fags, booze, gambling and guns.

Previous post: How to use less plastic and cut costs 

Ethical investing may only account for a small proportion of investing, at 1.4% of total funds under management according to the Investment Association, but it’s growing.

 

Top tips for ethical investing

Here’s what I’ve discovered:

1)    Funds not shares

Personally, I’m still a bit wary about bunging everything into any old “SolarPanelsRUs” outfit. I don’t want to invest in rechargeable batteries, only to find they’re dead in the water. Ethical aims don’t stop a start up from shuddering to a halt.

Instead, I’d prefer to use ethical funds, knowing my money will be spread over lots of different companies. That means if any one goes down the tubes, it won’t hit my balance so hard.

2)    Ethical funds come in different shades of green

Turns out there are loads of different ethical funds out there – environmentally friendly, socially responsible, sustainable, ecotastic, the whole shebang.

 The only trouble with ‘green’ funds is that they come in more shades than a Dulux paint chart. So do check inside the tin, take a dekko at the list of top holdings, to see if you’re happy with the companies included.

There are a few different approaches:

For a hint of green, some ethical funds avoid investing in companies that do harm, like tobacco companies, arms dealers and alcohol producers. This is called negative screening,  knocking out companies that don’t pass their ethical test.

For a deeper shade of green, sustainable funds choose companies that actually do good, everything from creating clean energy to making recyclable products and improving the developing world. This is known as positive screening.

For deepest, darkest tie-dyed green, try impact funds, focused on companies that make a measurable social or environmental difference.

 

Different funds, different shades of green

3)    You may be surprised at what counts as ethical

Ethical? Isn’t that obvious?

Well no. Your ethical might not match mine.

If you’re passionately anti animal testing, you might not want to put a penny in drug companies. But some funds include pharmaceuticals because of the benefits to world health.

Rail against oil companies, due to concerns about climate change and environmental damage? But some ethical funds do invest in big fossil fuel producers – if they meet other ethical criteria, by doing loads more than their competitors to develop renewable energy sources, treating their employees well or pursuing other green initiatives.

So look behind any ‘ethical’ label if this matters to you.

4)    Brace yourself for a bumpy ride

Good intentions don’t guarantee a company will be a major money spinner.

In fact, ethical funds can be more risky, precisely because they chuck out some ethically dubious business giants and end up focused on smaller and medium-sized companies.

Smaller companies may have the potential to grow further and faster than long-established mega businesses, but they’re also more likely to fail. So buckle up for a bumpy ride, as your balance could bounce around all over the place. Like any other investment in the stock market, you could get back less than you originally put in.

 

Picture of crops in a field for my post on ethical investing

Investing to avoid environmental damage

5)    Prepare to pay for your principles

I like funds with low annual charges, because low fees eat up less of your returns.

But ethical investing is a bit like paying extra for organic food or opting for free-range eggs.

Yes, you can find cheaper ethical options that follow a stock market index like FTSE4Good, which includes companies ‘demonstrating strong environmental, social and governance (ESG) practices’.

But you may have to pay a bit more, if you want an ethical fund that picks and chooses between companies, makes sure they are sticking to ethical standards in future and puts pressure on the management to improve.

6)    You don’t have to be a millionaire to invest ethically!

The good news is that you don’t need to squillions of pounds to invest ethically.

You can start with as little as £1 using a new-fangled investment website like Wealthify, where fund charges for ethical funds average out at 0.54% a year, plus 0.03% a year for the Wealthify fee. (That compares to average 0.21% plus 0.03% for Wealthify’s standard funds).

If you want to pick and choose your own funds, the big fund supermarkets and investment companies like Aviva all have ethical funds on offer.

So whether you want to set up an Isa, pay into a pension, or start investing for your children, you can find ethical options.

 

Now – over to you. Does ethical investing matter to you? Or do you just want to make the most of your money, regardless of which companies it supports?

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2 Comments

  1. 9th February 2019 / 3:22 pm

    I’ve been thinking about this topic a lot recently. Definitely something I want to do some more research into. Thanks for the info.

    • Faith
      Author
      11th February 2019 / 10:43 am

      Glad it was helpful! I reckon people are becoming increasingly interested in using their money to make a difference, both when investing on their own behalf and for their children.

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