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Morals and money

Published: 11 October 2016

Can you make a profit from investing in line with your principles? That’s the question being asked by more and more investors as the ethical investment universe continues to expand.

Ethical funds have been available in the UK since 1983, when Friends Provident launched its Stewardship range, and the market has grown steadily since. More than £15bn was invested in UK-listed green and ethical funds by 2015, according to EIRIS, the sustainable investment research specialist, up from approximately £6bn a decade earlier.

Research conducted in 2015 to mark the annual Good Money Week found that more than half of UK investors want their investment and pension fund holdings to have a “positive impact”.

The issues investors care about

There are now more than 80 ethical or socially responsible investment (SRI) funds available in the UK, says EIRIS, giving investors plenty of choice.

The sector has become broader too. The Good Money Week poll revealed that the main ethical/Socially Responsible Investing (SRI) issues for investors are now corporate governance-related factors such as bribery and corruption, tax avoidance and data protection, whereas historically the sector has tended to be associated with the environment and green issues.

The sector houses a wide range of approaches, however, posing a challenge for investors when it comes to comparing different options and understanding how different funds and trusts operate.

Different funds take different approaches

Some funds take a “negative screening” approach, for example. This is where they have a set of criteria that guide what the fund cannot invest in, such as gambling, tobacco, alcohol, pornography, child labour, animal welfare and military and nuclear power. While screening out some sectors, those funds may invest in others that many investors might not see as particularly ethical or socially responsible.

An alternative approach is to engage with companies in the hope of driving an improvement in their behaviour and their policies. For instance, while some people may consider it unethical to invest in firms that use animal testing, others may see it as essential in developing treatments for diseases.

So understanding the different types of ethical funds out there can be tricky. But if you know what your main issues of concern are, it’s easier to find vehicles with policies that reflect your principles.

For instance, if you just want to avoid, say, arms manufacturers and tobacco firms, most broad-based ethical funds will probably meet your requirements. But if you want to avoid all sectors you consider unethical, or invest with a fund manager that works with firms to improve their behaviour, your search will more likely focus on a particular universe of ethical/SRI funds.

What about investment returns?

Performance is also a factor, of course. There has long been a school of thought that ethical investing requires compromising on investment returns. But that isn’t necessarily true, especially as the sector grows.

Ethical investment firms believe that companies which pay attention to their wider social and environmental impact are more likely to deliver sustainable, long-term performance and steer clear of reputation-damaging scandals. The average ethical/SRI fund was up 8.2% in the year to October 2015, according to research by Investment Life & Pensions Moneyfacts, compared with returns over that period from the average non-ethical fund of 6.8%.

Ethical/SRI funds benefited in 2014 and 2015 from the sharp fall in oil and commodities prices, as they typically have little or no exposure to companies in those sectors. They also outperformed over three and five years too, although non-ethical funds prevailed over the ten-year timeframe.

Building your ethical portfolio

Whether you simply want to have ethical/SRI funds alongside your other investments, or would like to ensure that all your investments are aligned with your ethical priorities, you will find a wide range of options available on the Alliance Trust Savings platform.

Visit our Investing Hub to find out more.

Morals and money

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in September 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

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