There are lots of conflicting messages about investing ethically, and lots of myths. Here are some of the main ones.
Myth one: You can’t make a profit if you invest ethically.
– Research shows that you don’t have to sacrifice long term performance if you invest ethically.
– As with mainstream investment funds, there are those that invest ethically and sustainably that perform well and those that don’t.
SAVVY TIP: Be aware that ethical funds can lose out compared to mainstream funds over the shorter term, especially during an economic downturn when many funds will increase their investments in companies that are less likely to be affected (so-called ‘defensive stocks’). These often include tobacco companies and oil and gas companies.
Myth two: Ethical funds only invest in ethical companies.
I’m afraid it’s not the case that ethical funds only invest in ‘ethical’ companies. Ethical, green and socially responsible funds can take a very different approach to how they pick which companies they’ll invest in.
– Some will focus on negative screening; this means they refuse to invest in certain companies, such as those involved in countries with a poor human rights record, those producing armaments or companies involved in mining or tobacco production.
SAVVY TIP: In general terms the more companies you screen out, the higher the risk (because you’re left with a smaller pool of companies to choose from) and the lower the returns. But some funds apply very strict criteria and have a good track record.
– Some funds focus on green and environmental investments. These are likely to invest in renewable energy or companies developing water recycling systems but they may also invest in seemingly unrelated companies such as waste management and organic pork production.
SAVVY TIP: Green and environmentally friendly investment funds may also screen out certain companies or sectors that don’t meet their criteria.
– Some funds engage with companies they invest in. This means that they try and get them to act in a more responsible and/or environmentally friendly way. However, they can only apply pressure when this will be in the company’s interests to act. These funds may also screen in/ out certain companies.
SAVVY TIP: The argument in favour of engagement is that your money can be used to bring about significant change. The argument against it is that ethical funds have far less influence than they believe and they’re not always very open about how they’re putting pressure on companies they invest in.
Myth three: All ethical funds are the same.
They absolutely aren’t! The differences in funds are significant.
– Some funds have an arm’s length committee that states which companies the fund can invest in. The fund manager still has the say about when to invest, how many shares to buy and when to sell but he or she isn’t allowed to invest in anything that’s not on the ‘approved’ list.
– Some funds are much stricter than others. A number of investment funds have shares in all manner of companies that some ethical investors don’t approve of (BP, British Gas and Tesco are names that frequently come up).
SAVVY TIP: If you want to avoid oil and gas companies, make sure you mention that to your independent financial adviser or look at websites such as yourethicalmoney.org, which scrutinises investment firms’ claims and compares that with what they actually do.
Myth four: Ethical investment isn’t any different from mainstream investing.
Although there are certainly some ethical and green funds that are full of the usual suspects, there are many that put a lot of effort and resources into trying to make sure they do stick by their principles. My advice would be to:
– Do your research: look beyond the branding and the marketing information (try myethicalmoney.org as an impartial source of information) or talk to a financial adviser who knows this market well.
– Think about what’s important to you: it’s likely you’ll have to compromise somewhere but that doesn’t mean investing ethically is a waste of time.
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