What exactly is ‘Ethical Investment’? And what comes under its banner?
At its most basic level, Ethical Investment simply means investors and their advisers can choose how to integrate ethical, responsible, social and environmental values into investment decisions.
This approach is also known as ‘Socially Responsible Investment’ (SRI) and has existed for around thirty years in Europe. Its value refers not only to economic value, but also to the broader values of fairness, justice and environmental sustainability.
A growing number of people are now choosing SRI or Ethical Investment. In fact, according to a YouGov survey for National Ethical Investment Week, 63% of British investors want to be offered a sustainable and ethical option when choosing their investments.
Whilst people used to think Ethical Investment would mean potential high returns would be sacrificed to social conscience, this has patently been shown not to be the case. It can prove to be a very sensible investment option as well as a satisfying way of investing for those with a responsible attitude to the wider world. In 2012, sustainable or ethical investments made by Europe’s high net worth individuals increased by 60% – compared to just an 18% rise in their total wealth [Source: Eurosif 2012].
The global sustainable investment market has continued to grow both in absolute and relative terms according to a Global Sustainable Investment Alliance Study, rising from $13.3 trillion at the outset of 2012 to $21.4 trillion at the start of 2014, and from 21.5% to 30.2% of the professionally managed assets in the regions covered.
So how does Ethical Investment work?
Funds are administered in accordance with a wide range of ethical, environmental and sustainable criteria:
- This can be by using negative selection to avoid investment in companies associated with certain areas, or
- Through positive screening to allow investment managers to actively invest in only those companies that reflect their own values and standards – this may include companies whose products or services are of long-term benefit to the communities and/or environments in which they operate.
- As shareholders in companies, investment managers can also use their influence through dialogue and engagement to encourage more responsible business standards in the companies in which they invest.
|Ruling out the Negative||Ruling in the Positive|
Investment managers will engage on matters such as inappropriate remuneration, unfair labour practices, social responsibility and climate change.
Why are more people seeking out, sustainable investments and why are these funds performing well?
- Investors prefer to integrate their ethical, responsible, social and environmental values into their investment decisions or if you like ‘want to know their money is doing some good.’
- People recognise the market opportunity to build a more sustainable economy – taking into account ethical, social governance (ESG) issues makes good financial sense.
- Companies making a positive contribution to our world and society are inherently in a better position to prosper than those that don’t.
- Investing sustainably does not have to cost more money – fees for many ethical or SRI funds are no more expensive than conventional actively managed funds.
- Many CEOs see sustainability as a way to gain competitive advantage, witnessing the positive relationship between corporate investment in sustainability and their share prices.
- A European study found that Sustainable and Responsible Investment strategies are growing at a faster rate than the broad European asset management market [Source: Eurosif European SRI Study 2014].
- Regulations and legislation increase costs for polluting companies. So lower polluting companies should continue to prosper [Source: Mercer, 2015].
An additional consideration is that social media can quickly publicise a company’s poor record of ethical standards with serious PR implications and the resulting impact on a company’s profit, share price and investors’ returns as in the case of the BP oil spill.
Our own Ethical Portfolios
Medical Money Management has been running ethical portfolios for the past six years. Do take a look at our Investor Hub – a useful resource showing the Portfolio Factsheets for each of the five Ethical Portfolios available. These outline the aims and objectives for each portfolio; catering for a variety of risk profiles from ‘cautious’ through to ‘adventurous’, and also indicate the past performance.
If you’d like to find out more about this increasingly popular investment option, please speak to your adviser.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.
Past performance are not a reliable indicator of future performance.
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