Invest in the planet - a guide to ethical investing
Do you want to invest your money but help the planet at the same time? Perhaps you'd like to invest directly into schemes that help tackle global warming , reduce the arms trade or damage the profits of companies that test on animals or are involved in unfair trade. With ethical investing, your money will do the much of the hard work for you whilst giving you peace of mind.
If you'd like to invest ethically, you're not alone. Around £6 billion is invested by over half a million people in the UK today, and there are more than 50 socially responsible investment funds to choose from in the UK.
The ins and outs of ethical investing to help you know where to start
Ethical investing is the same as any other type of investing. The only difference is that you invest your money with a company that promises not to use it to fund activities that are considered harmful to either the planet, to people or to animals; or invest in a positive way to support ethical companies and good causes. It combines your principles with your financial goals, and lets you use your money in line with your values.
Why invest ethically?
- Ethical investing incorporates a wide variety of issues. It can mean avoiding investment with companies that contribute towards pollution, unfair trade, deforestation and genetic engineering. It can also mean avoiding doing business with companies that are involved in the arms trade, in animal testing, gambling, sweated trades, battery farming or the use of chemicals.
- Perhaps you are worried about climate change, or don't want your money to be used to fund the arms trade? Perhaps you want to reward companies that use renewable energy or have a good record of equal opportunities and want to damage the profits of the companies who don't? Ethical investing is a way of making sure your money matches your principles.
Good returns
People used to think that you had to be prepared to accept a lower return on your investment if you invested ethically - but not any more. The CIS Sustainable Leaders Trust has outperformed the UK equity market over the last three years. For the three-year period ending 29/09/06, the fund delivered a total return of 75.2%, compared with the UK FTSE All-share which delivered 65.6%. Source: Standard and Poor's Micropal.
The Observer recently reported that 70 per cent of the ethical funds in the UK All Companies sector were in the top quarter of the performance tables in 2006.
What is positive and negative screening?
Positive and negative screening is a way that funds can pass an ethical test in order to prove to their investors their funds are worth investing in.
What is negative screening?
Negative screening is when the activities of a company are compared against a set list of negative practices. If they are involved in too many they may be considered as unacceptable for ethical investment. Some or all of the negative practices include:
- The oil industry
- The arms trade
- The fur trade
- Oppressive regimes
- Alcohol and Tobacco industries
- Logging and mining
- Nuclear power
- Animal testing
- Genetic engineering
- Deforestation
- Gambling and Pornography industries
- Poor employment conditions
- Poor health and safety
- Poor pollution record
Funds that use negative screening are called
"Dark Green funds", and like the name suggest are considered the greenest ethical investment in the market. However, they will limit the amount of companies the fund can invest in, unlike positive screening.
While negative screening will avoid investing in companies that do not meet their criteria, positive screening makes decisions about certain business practices that have positive impacts and invests specifically in them. Positive screening involves analysing and purchasing shares in companies that promote some or all of the following positive practices:
- Renewable energy
- Pollution control
- Fair trade
- Community involvement
- Ethical employment practices
- Recycling
- Energy conservation
- Equal opportunities
- Charity and community support programmes
- Development of social housing
- Health and safety management
- Human rights policies
- Waste management
- Packaging reduction
Funds that use positive screening are called "Light green funds", because they may include companies with a less than perfect record, but may work closely with companies to change their practices. However, it is very rare that fund managers screen all of their shares or companies positively, and many will employ some negative screening too.
What's best - positive of negative screening?
The merits of positive or negative screening are really open to debate and largely depend on whether you are an idealist or a pragmatist. Some people argue that it's wrong to profit from companies or activities that do harm to others, so a negative screening approach works best for them. On the other hand, the pragmatists argue that working with companies, through engagement and positive screening is far more likely to make a difference. There's also an odd logic to avoiding investing in Oil companies whilst filling up your car at BP on the way home from work.
Before you begin:
- Think - It is very important that you think about what ethical principles are most important to you and make them clear at the start. Perhaps you want to invest in a company that promotes fair trade or is committed to climate change. However, they may be involved in animal testing or genetic engineering. You have to weigh up your priorities before you invest, else you may end up sacrificing your principles in the quest for a good return.
- Choose - When you have made this clear, decide which fund will best meets your ethical principles and investment goals. Do you just want to invest some of your savings and investments ethically or do you also want to invest some of your Pension fund directly into Ethical funds?.
Amount - Think about how much you want to invest. Do you want to invest 100% of your money into Ethical funds, or do you want to start off by investing a small percentage so that you can have a more balanced approach and spread your risk evenly across your investment and Pension fund portfolio?
- Before you jump on the environmental bandwagon, please do your homework. Remember that investments can do down as well as up, so you may want to discuss your options with an independent financial adviser.
What to do next?
With so many options and funds to choose from it can be a bit daunting to know where to start. So, we've put together a handy list of other resources that can help you:
- EIRIS Guide to Ethical Funds (http://www.eiris.org/)
- Ethical Investors Group (http://www.ethicalinvestors.com/)
- Trustnet (http://www.trustnet.com/)
- UK Social Investment Forum (http://www.uksif.org/)
- Ethical Investment Association (http://www.ethicalinvestment.org.uk/)
