The amount of assets that are invested whilst considering the impact it will have has increased. More investors than ever before are taking ESG (environmental, social and governance) factors into consideration to align their portfolio with their values. But what investment strategies are there that allow you to reflect this?
The 5th – 11th October marked Good Money Week, an awareness week that aims to showcase the sustainable and ethical options when it comes to banking, pension, savings and investments. If ethical investing is something you’ve been thinking about and you want to incorporate your values into financial decisions, now could be the perfect time to do so.
Choosing investments for reasons other than financial gain has been a trend that’s gradually gaining traction. Of course, this doesn’t mean that you disregard returns, it’s about taking multiple factors into account. As a result, ethical investing is sometimes referred to as having a ‘double bottom line’; the return it delivers to you and the positive benefit.
According to research:
So, if you do want to invest with ethics in mind, what are your options? There are three key strategies to be aware of:
1. Negative screening
When people talk about ethical investing, this is often the first strategy that springs to mind. It involves divesting and avoiding investing in companies that don’t align with your values.
For example, if you’re seeking to ensure your portfolio has a positive impact on climate change efforts, you may decide to no longer want to invest in companies with activities in fossil fuels. Alternatively, if human rights are a key concern, you may decide to avoid retailers that have exploitative practices within their supply chain.
When you see ‘ethical funds’ this is usually the top strategy they’ll use, although the criteria can vary significantly between funds. One of the issues with this strategy is that large, multinational companies will often derive profits from multiple industries, particularly when you consider subsidiaries. As a result, funds will often allocate some leeway, for instance, avoiding companies that derive more than 5% of their profits for certain activities.
In terms of your investment and returns, negative screening will potentially mean cutting out entire industries. As always, it’s important to keep in mind how balanced your portfolio is and how it aligns with your financial goals.
2. Positive screening
In contrast to the above, you don’t avoid investing in certain companies when using a positive screening strategy, but actively seek to invest in certain firms. It means investing in businesses that are championing the values you have.
Going back to the climate change example, with a positive screening strategy, it may mean investing in companies that are operating in renewables or researching new technologies that could help. Often, investors will allocate a portion of their investment portfolio to supporting their values.
This has both pros and cons. One advantage is that it means you don’t miss out on potential investment opportunities, as you may with a negative screening process. On the other hand, it may mean investing in companies that don’t align with your values.
Finally, an engagement strategy is about using shareholder power to encourage change within a company. Due to needing significant shareholder power to influence, this strategy is more commonly used by institutional investors, such as pension funds. However, that doesn’t mean it’s irrelevant to you. It’s still possible to engage with your pension provider, for example, to encourage them to use their influence.
Which strategy is right for you?
It’s important to keep in mind that there’s no right or wrong answer here.
You may have a preference about which strategy you’d prefer, or maybe you want to blend them. However, it’s just as important to look at your wider financial circumstances and how investment decisions will affect your goals. This is an area we can help with. Looking at your existing assets and how these can be adapted to reflect ethical views, can lead to a portfolio that supports both your ethics and aspirations.
Setting out your values
If you’re beginning to consider incorporating ethical investing in some way, the first step is to consider your values. What’s important to you?
One of the challenges with ethical investing is that it’s a highly subjective area. What you may consider unethical, may be acceptable to others. This can make it difficult to find funds that align with your views. Setting out what your priorities are can give you a starting point. According to research from Triodos Bank, the top five industries investors would want to avoid are:
Do you agree with these? Before investing your money through an ethical fund, take some time to look at the criteria. There may be instances where you need to compromise, so you should also think about how comfortable you’ll be with this.
If you’d like to discuss your current investment portfolio, please get in touch. We’ll help you understand how it’s currently invested and potential changes that could be made, reflecting your views and financial position.
Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.