What does ethical investing in funds involve?

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If you’re thinking of investing ethically, what exactly does that mean? More people are becoming interested in where their money is invested, so how can you get started?

What is ethical investing?

With words like ethical, sustainable and socially responsible often used interchangeably, you might be confused about the different investment terms.

SAVVY TIP: Don’t worry too much about the jargon. What’s important is that you look behind the investment or fund’s name at where your money is invested and the kind of companies your money supports.

Ethical investing funds

In basic terms, investment by ethical funds involves:

  • Screening. The investment fund looks at whether or not a company it is considering investing in meets its ethical criteria before it invests.
  • Negative screening. Some ethical funds only screen out companies negatively, which means they only exclude companies that do not meet their criteria. Other investment funds positively select companies (positive screening) as well.
  • Exclusions. The companies that an ethical fund excludes will vary widely. This is where you have to do some research.  If you’re using an independent financial adviser, they should know this or be able to find it out for you.

SAVVY TIP: Different funds will have different cut-off points. For example, one ethical investment fund may not invest in a company if it sells cigarettes full stop. Another might invest in a company that gets no more than 10% of its revenue from sales of cigarettes, another might be happy to invest in companies that sell cigarettes, but not those that manufacture them.

Green and climate change funds

Green, environmental or climate change funds don’t have to use ethical screening to exclude companies (although they can choose to do so).

Green funds may invest in:

  • Renewable energy. This could include manufacturers of solar panels or wind turbines.
  • Companies benefiting from climate change. Such as firms supplying safety equipment for wind turbine manufacturers and those involved in waste recycling.
  • Companies with a good environmental record. Be careful about what counts as a good environmental record (it should be more than printing annual reports on recycled paper and recycling plastic cups).

SAVVY TIP: Some green and climate change funds may invest in companies involved in nuclear power as they view it as part of the solution to climate change; other funds refuse to invest in this area. If you have strong views on nuclear power, check that the fund will be in line with them.

Funds that engage

Engagement means that those running the investment fund put pressure on companies they invest in to improve their behaviour. Some think engagement is the way forward – because if you get a global company to make changes, even small ones, it can have a massive effect, others are sceptical that funds don’t put enough pressure on companies they invest in.

Engagement funds can:

  • Use screening. Some funds combine engagement with an ethical screening approach, but many don’t.
  • Put pressure on companies when there’s a business case for change. An investment fund could not put pressure on a tobacco company to stop making cigarettes but it could encourage it not to target young smokers in new markets.
  • Publish results of engagement. A number of funds have persuaded companies to change their behaviour, but they don’t always talk about it.

SAVVY TIP: Find out as much as you can about how active a fund is before you invest. Ask whether it votes at annual general meetings, whether it has a dedicated engagement team and how long it’s had a policy of engagement for.

Useful links:
There’s information about ethical investing on the website Good With Money and (apologies for the plug) my book, Green Money, how to save and invest ethically, covers all aspects of ethical money.

There’s information about investment funds on Yourethicalmoney; a one-stop shop for anyone interested in green or ethical money.

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VIDEO: What is ethical, green or responsible investing?

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