Ethical Fund Investment: Getting Started And Doing Good

Ethical investing is an increasingly popular strategy that allows investors to put their money where their morals are. It involves selecting investments based on an ethical code, such as religious or social values, alongside financial returns. The aim is to make money while helping to make the world a better place.

Ethical investing is an umbrella term that covers a range of approaches, including socially responsible investing, sustainable investing, and environmental, social and governance (ESG) investing. The key difference between ethical investing and socially conscious investing is that the former brings about a more personalised result, while the latter typically has one set of overarching guidelines for selecting the portfolio.

There is a common misconception that ethical funds underperform, but there is no evidence to support this. In fact, research suggests that sustainable funds are longer-lasting and often outperform their traditional peers.

Understand your values and ethical measures

Understanding your values and ethical measures is the first step in building an ethical investment portfolio. Ethical investing is a personal endeavour, and what is ethical to you may not be to someone else.

Firstly, you should decide whether you want to apply an ethical investment strategy across all your investments or just some areas. For example, are you happy to back a company that operates in an industry you don't agree with? Would you feel comfortable investing in an oil company that is working on renewable energy? It's important to keep an open mind, as it will be difficult to find a fund or company that ticks all your ethical and sustainable boxes.

Next, you should outline what an ethical investment looks like to you. Knowing what industries you want to support and which you want to avoid will make it easier to include or exclude certain investments.

If you are already an investor, identify the ethical characteristics of each pot that you hold. If they don't align with your values, figure out whether you can change your investments or funds, or whether you need to look at changing your investment provider.

You should also consider whether you want to build your own portfolio or get some help. Building your own portfolio may be a good idea if you want to be sure that your investments align with your ethics, but it will require a lot of time and effort to figure out how committed a company is to ethical practices. On the other hand, robo-advisors can build and manage investment portfolios for you based on your ethical preferences, but you won't be able to add specific investments to your portfolio.

Finally, you should research independent reviews from companies such as Morningstar to get an idea of how well a company scores in terms of ESG investing factors.

Research and compare ethical funds

Researching and comparing ethical funds is a crucial step in ethical investing. Here are some detailed instructions to help you navigate this process effectively:

• Understand your values: Before investing, it is essential to identify your ethical priorities. Are there specific industries or activities you want to avoid supporting, such as fossil fuels or animal testing? Do you want to focus on environmental issues, social justice, or a combination of both? Clarifying your values will help you evaluate and compare different ethical funds effectively.
• Evaluate fund philosophies and processes: When researching ethical funds, examine their investment philosophies and processes. Review their literature, reports, and websites to understand how they define and implement socially responsible investing. Look for funds that fully embrace and integrate ESG (Environmental, Social, and Governance) factors into their investment strategies. Funds that produce impact assessments and have a strong commitment to ESG are more likely to align with your ethical goals.
• Consider in-house vs. third-party ESG research: Funds that rely on in-house ESG research tend to be more reliable. While third-party ratings can be helpful, they may not always be consistent or fully trustworthy. Funds that conduct their own research demonstrate a deeper commitment to ethical investing.
• Assess fund voting practices: A critical aspect of ethical investing is how fund managers vote at the annual meetings of the companies they invest in. Fund managers should actively vote on key issues and be prepared to vote against management when necessary to drive positive change. This indicates their genuine intention to influence companies' practices and policies.
• Examine fund holdings and transparency: It is essential to look beyond the top holdings of a fund. Ensure you can access and review the entire portfolio of underlying companies to ensure they align with your values. Funds that provide full transparency about their investments allow you to make more informed decisions.
• Compare fees: Don't forget to consider the fees associated with ethical funds. While fees are important, they should not be the sole deciding factor. Compare fees within the context of the fund's performance, impact, and alignment with your values.
• Utilize resources: Take advantage of available resources to research and compare ethical funds. Morningstar, Fund EcoMarket, and ShareAction's checklist are excellent places to start. You can also refer to tools provided by investment platforms, such as filters for ESG claims and top holdings. Additionally, seek out independent financial advisers who specialize in sustainable and ethical investing, such as those associated with the UK Sustainable Investment and Finance Association.

Decide how involved you want to be

Deciding how involved you want to be in the process of ethical investing is an important first step. You can choose to build your own portfolio or get some help.

Building your own portfolio means you can be sure that the investments align with your ethical values. Some brokerages have screener tools to help you find the right funds, but it is a lot of work. You will need to put in the time and effort to figure out how committed a company is to ethical practices and which ones it prioritises.

If you don't want to dedicate time to researching stocks, you can get help from robo-advisors, which use algorithms to build and manage investment portfolios based on your risk tolerance, goals, and ethical preferences. Robo-advisors are often cheaper than traditional advisors, but you generally won't be able to add specific investments to your portfolio. You will need to investigate a robo-advisor's methodology to ensure it uses both inclusionary and exclusionary filters if that is important to you.

Some robo-advisors that offer socially responsible portfolios include:

• Betterment
• Wealthfront
• Merrill Edge Guided Investing
• Ellevest
• Ally Invest
• Marcus Invest
• Acorns
• E-Trade
• Stash
• Axos Invest

Monitor your investments

Monitoring your investments is a crucial part of ethical investing. Here are some key considerations and steps to help you effectively monitor your investments:

• Regular Reviews: It is recommended to review the performance of your ethical investments on a quarterly basis. This allows you to track how your investments are doing and make any necessary adjustments.
• Performance Evaluation: When reviewing your investments, consider their financial performance and how they align with your ethical goals. Evaluate if the companies you've invested in are meeting their environmental, social, and governance (ESG) criteria.
• Engagement with Companies: Monitoring your investments also involves engaging with the companies or fund managers. This could include attending annual meetings, reviewing reports, and assessing their commitment to ethical practices.
• Ethical Standards Maintenance: Keep an eye on the companies you've invested in to ensure they maintain their ethical standards over time. This includes monitoring their actions, commitments, and any changes in policies or practices.
• Comparison with Industry Standards: Compare the performance and ethical standards of your investments against industry benchmarks and peers. This will help you identify areas where your investments may need improvement or adjustments.
• Seek Professional Advice: Consider consulting financial advisors or experts in ethical investing to gain insights and advice on monitoring your investments effectively. They can provide guidance on evaluating the financial and ethical performance of your investments.

Remember, monitoring your ethical investments is an ongoing process. As ethical standards and practices evolve, be prepared to adjust your investment strategies accordingly. Stay informed about industry developments and seek out resources or tools that can assist you in monitoring your investments effectively.

Understand the limits of ethical investing

Ethical investing is a complex and highly personal endeavour. While it is possible to make money while supporting causes and companies that align with your values, there are some limits to ethical investing that you should be aware of.

First and foremost, the definition of "ethical" varies from person to person. What is ethical to one investor may not be ethical to another. This lack of a universal definition makes it challenging to create industry-standard approaches to ethical investing. As a result, it is crucial to thoroughly research and understand a fund or advisor's methodology for selecting investments. Some portfolios marketed as "sustainable" or "socially responsible" may simply exclude investments in controversial industries without actually including any positive-impact assets.

Additionally, ethical investing is a relatively new concept, and the financial industry is still catching up with the idea of connecting morals and money. This means that there may be limitations and frustrations along the way. For example, you may find that a specific ESG fund includes holdings in companies that do not align with your values. It is important to remember that ethical investing is a fledgling industry, and there is ongoing work to address these limitations.

Furthermore, there is no guarantee that ethical investments will perform better than traditional investments. While some research suggests that ethical funds may offer superior returns and lower market risk, there is no definitive evidence to support this claim. The performance of ethical funds depends on various factors, including the fund's investment strategy, the expertise of the fund manager, and the overall economic climate.

Lastly, ethical investing requires time and effort. Building an ethical portfolio can be a time-consuming process, especially if you choose to create your own portfolio by picking individual stocks or funds. It takes significant research to figure out a company's commitment to ethical practices and whether its values truly align with your own.

Despite these limitations, ethical investing can be a powerful way to support causes and businesses that are making a positive impact. By understanding these limitations and doing your research, you can make more informed decisions about where to allocate your capital.

Frequently asked questions