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Ethical Investment Funds: Expectation vs. Reality

Have you noticed that everyone seems to be striving to be more ‘green’ these days? For most of us, thinking about what effect our everyday decisions have on the planet seems to be more prevalent, which can only be a good thing for our planet and future generations.

Recycling our packaging, buying eco-friendly products, driving hybrid vehicles and overall trying to reduce our waste is all very well, but what about looking at where we are investing our money? Is it truly possible to be an ethical investor? And what does that look like for you and your money?

The world of ethical financial management

The trend for both businesses and consumers to be more ‘eco-friendly’ has, so far not had quite the same impact on ethical investment funds.

According to the Ethical Consumer Markets Report 2017 (UK), while ethical financial productshave seen steady, slow growth over the last few years, ethical investment funds represented less than 2% of the total UK investment fund market in 2017 – not exactly setting the investment world alight just yet!

Why aren’t more people investing in ethical finance?

It’s not that we’re not interested in it – research by Ethex (2019), shows that 3 in 5 people interviewed took into account ethical considerations when looking for financial services. Only 17% of them then went on to make more socially responsible investments. Some of the reasons given for this was a lack of information and that the products aren’t easily accessible.

And it’s not that there’s a lack of different funds and products out there, there’s a vast abundance – but this in itself can be tricky to navigate through.

Applying it back to the everyday decisions that we make – have you noticed that it can sometimes be really confusing trying to be an ‘eco-friendly’ shopper?

‘Sustainable,’ ‘green,’ ‘low carbon,’ ‘reduced plastics,’ ‘animal-friendly’ and ‘kinder to the planet’ – there are so many different, often contradictory messages and choices that it can be difficult to work out what to do for the best.

This is often the case when it comes to looking at ethical investment funds too.

What does an ‘ethical’ investment mean anyway?

Being an ethical investor involves investing your money in projects and financial products that positively impact the world, while still looking to generate a positive return for your money. And It doesn’t mean that you should necessarily always expect less of a return for your money because you’re making a socially responsible investment. In fact, on occasions, our team have seen some ethical investment funds outperform more than some traditional ones, whereas others may generate a smaller or similar return. It’s about understanding the market and opportunity, or as we like to say ‘Where’s the beef?’

They aren’t always green!

Also, labelling an investment fund ‘ethical’ doesn’t always mean it supports renewables or companies with a low carbon footprint. Ethical investment funds could also finance projects that have a positive, social impact, i.e. investing in a local leisure centre, or microfinance projects – funding small amounts to entrepreneurs who could otherwise not start a business.

Beware the ethical spectrum!

For businesses, being ethical is not so clear-cut. Even the most eco-friendly companies still generate pollution, whether it’s from employees travelling to and from their offices, or the vehicles that deliver their products to you.

There is a spectrum, along which businesses range from those who claim to be ethical, but perhaps are less than so, to those who are entirely green and environmentally friendly, with many businesses and investment funds falling somewhere in between.

Take ‘animal-friendly’ portfolios, for instance; some exclude all companies that test on animals, whereas others still invest in businesses who do animal-testing for medical research.

Ethical investments – what on earth…?

There are many different kinds of ethical investment funds. Here are some of the terms you may need to know to sort out what’s what!

  • Impact Investing – Investing your money with the goal of making a positive impact on society, or the environment, and on your bank balance too!
  • Negative Screening – Some funds use this to rule out investing in companies that are investing in particular sectors like animal testing, alcohols, arms, tobacco, gambling and fossil fuels.

Just because something is excluded doesn’t mean that all of the companies in the portfolio will be ‘eco-friendly,’ i.e. a fund banning those involved in tobacco, might still invest in oil.

  • Sustainable Investment Funds – Funds that use ‘positive screening’ to seek out businesses which are investing in positive environmental, social and governance (or ESG) initiatives.

Even if a company is ‘sustainable’, this doesn’t take into account the impact of their product or services. E.g. a portfolio might include a company which has significantly reduced its carbon footprint, but they produce bacon – not good if you are vegan!

Where to start?

Is ethical finance management something you’re interested in? If so, think about what being an ethical investor means to you.

  • What are your values?
  • What are your financial aims and goals? Perhaps you want to make more returns on your investment, but don’t want to invest in any companies involved in animal testing?
  • What do you want to invest in? Companies who can make a positive impact on your local community?  Global businesses that work to reduce their carbon footprint?
  • What are you passionate about? Renewables? Animal rights?
  • What kinds of companies and projects don’t you want to support? Fossil fuels? Alcohol?
  • Are you looking for long or short-term returns?

As with any investment decision, your next step should be to talk with your financial advisor to help you work out which investment funds are likely to be the most profitable for you and which align most with your goals and values.

Speak to us today on 0191 217 0007

Carrick Financial Management are a highly experienced team of independent financial advisers based in Newcastle. We are FCA Authorised, and we promise not to bore you with our ethical financial knowledge!

If you are looking for straightforward, Independent advice, Call one of our specialists today on 0191 217 0007 or email enquiries@carrickfinancialmanagement.net.