Assets held in ethical funds have more than trebled over the past decade as investors in the UK pour funds into green and socially responsible companies.
When the first UK ethical fund was launched back in 1984, most investors were sceptical. However, over 30 years later, ethical investing has become increasingly popular and is now well-established with money in ethical funds rising to £16.7bn.
It’s about making a difference
Ethical investing is investing with a conscience. It is a method of long-term financial growth, while ensuring that you are investing only in companies with high environmental, social and governance standards (ESG). Having an ethical portfolio means that you can ensure your investment funds exclude any companies that profit from harmful activities. This could include products involved with:
- Tobacco products
- Weapon manufacturing
- Adult entertainment
- Animal testing
- Intensive farming
- Nuclear power
- Genetic engineering
Instead, your money is placed into investments that make a positive impact through their practices. Ethical funds will also carry out positive screenings which look for companies that demonstrate excellent ESG practices. Your fund manager will look at many factors to determine the positive impact that business makes, from the amount of energy wasted by an organisation to relations with stakeholders and shareholders.
You can combine your values with value
There is often the misconception that ethical funds which incorporate Socially Responsible Investment (SRI) and Environmental Social Governance (ESG) characters will perform worse than those without such restrictions. This is not true.
Evidence suggest that stocks of companies which are more ethically responsibly can perform equally well, since their stock prices see less negative impact from industry fines and news scandals.
When investing ethically, your money is still invested into multiple funds containing a wide range of shares and bonds. This diverse portfolio of investment products means that following dramatic changes in the stock market, your investments have a safety net to ensure that the value of your portfolio remains.
Where has this rise come from?
This boom in ethical funds follows a string of high-profile governance failures, ranging from the Volkswagen emissions scandal to a series of rows at FTSE 100 companies over high executive pay.
Now, more than ever, a poor record on environmental and social issues are widely seen as a red flag by investors from a risk perspective, as well as an ethical one. Large institutions are coming under increasing pressure to closely scrutinise the companies they invest in. For example, investment officers at Cambridge University’s main endowment fund stepped down due to growing pressure to dump investments into fossil fuels.
Also, as more millennials become financially stable and independent, they have more money to invest. A recent YouGov poll reported that millennial savers are twice as likely as older generations to want their pension to be invested responsibly.