Talk Money Week: What is ethical investing?

By George Uglow, financial planner at Irwin Mitchell

Ethical investing is arguably becoming one of the most discussed topics in the investment world and will be even more so, following this week’s COP26, which is the United Nations Climate Change Conference.

So what is it?

In its simplest form, ethical investment is a strategy where investments are selected based on the investors own ethical views, rather than the traditional risk/reward ratio. Investors are targeting a financial return, whilst also wanting to create a positive impact on society or the environment.

When it comes to ethical views everyone is different, some individuals want to actively include companies that have positive impact on society, whereas others want to actively avoid or exclude companies that are viewed as having a negative impact. This is known as positive and negative screening.

As a Financial Planner it is important to fully understand what your client’s objectives are so that you can ensure any ethical investment recommendations are suitable for the client’s needs.

There is no one size fits all when it comes to ethical investment and solutions come in many forms, a few of which I have highlighted below.

ESG (environmental, social, governance)

• ESG factors are a set of standards that can be used to measure the social consciousness of a business. Firms that score highly against these factors could be considered for use within an investment portfolio.
• Environmental factors could include what kind of impact a company has on the environment. This could be their support of climate change, reducing pollution or alternative energy solutions
• Social factors could include how a company impacts the wider community as well as within the company. This could be how they interact with the local community, charity work, mentoring programmes or their support of human rights issues.
• Governance factors could be how the company is managed to push for positive change. This could be ensuring diversity across all positions, as well as equal pay and ensuring transparency for shareholders.

SRI (socially responsible investing) 

• SRI is selecting stocks or funds based on a set of positive or negative screening factors; these will be based on the individual’s personal ethical views.
• The investor could exclude areas such as alcohol, tobacco or gambling, but include companies aiming to make a positive impact such as solar energy companies. 

Impact Investing

• The main goal of impact investing is being able demonstrate or measure the positive outcome that an investment has had.
• These investments are used to assist organisations or business to achieve specific goals that will be beneficial to the environment or society.

Personally, I feel that ethical investing will be more and more prevalent in the years to come especially with the myriad of environmental and social issues that continue to dominate the news in recent times. There are certainly many solutions available for investors in the market place, the key is to truly understand what you are looking to achieve and ensuring that this is correctly aligned with the fund’s objectives.

It is also important to consider potential drawbacks of ethical investment. Firstly, assessing/screening investments in this way can carry additional costs in view of the additional research and administrative support required to achieve the desired outcome. Secondly, by not including or avoiding certain companies this could impact the longer term returns on the portfolio.

Overall I think ethical investing is here to stay and returns are no longer simply measured in pounds and pence, but more so in how they positively impact society and the environment. If you are interested in becoming an ethical investor or want to understand more about how your ISA or pension funds are invested, you can arrange a review with a Financial Planner who will be able to undertake a full review to ensure your investments are suitably aligned to your objectives.

Wealth Management | Irwin Mitchell

The information given and opinions expressed are subject to change and should not be interpreted as investment advice. It is also important to note that the value of investments are not guaranteed and can go down as well as up. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.