With issues such as global warming, recycling, the environment and cancer affecting so many of us in our everyday lives, the ethical and public health agenda is now far beyond being the domain of a small minority of ‘activists’, having become virtually mainstream in today’s society.
The proliferation of information surrounding these issues online and via social media has further brought them to the fore and as a result, there’s now a growing swathe of conscious consumers out there who actively seek out ways to make positive decisions about what to buy and where to buy it from.
In line with this, the financial advisers here at Gresham have certainly seen an upturn in the number of clients requesting a more ethical approach to their investments over the past couple of years.
Ethical investing is an investment strategy which seeks to consider both financial return and social good to bring about a social change. Specifically, it is a method of investing that considers the social impact on people and the sustainability of the environment and will discount stocks from industries such as alcohol, tobacco and oil production, animal testing and armament firms.
But is there a conflict between ethical investing and achieving healthy investment returns from your portfolio? Or does ethical investing just require a bit more thought and planning? Here we discuss some of the factors you need to consider in relation to ethical investments.
Choice of funds
One of the main things to consider in relation to ethical investments is the reduced choice of funds that will be available for investing into. Some ethical or ‘green’ funds take a very restrictive approach to investing and as such, clients going down this route may lose out on the gains seen in some potentially lucrative markets. For example, by choosing not invest in tobacco company stocks, which have shown strong investment returns over the last 12 months, it may be that your portfolio produces lower returns, compared to a portfolio that did. Whilst this may be a moral standpoint that you are happy to take any potential hit on, it is important to be aware of this from the outset so you can weigh up the strength of your feelings against your desire to see the best possible returns on your investment portfolio.
Exposure to market volatility
Whilst ethical investing does reduce the variety of funds available for investment, this doesn’t inherently mean that the outcome will be any less favourable. In fact, due to the volatility in the oil market over the past 18 months, some ‘ethical’ funds have actually outperformed other indices. For example, based on investment performance over the past 3 years, a typical ethical fund had returned circa 32%-35%, compared with 28% for the FTSE All-Share index and 24% for the AFI Balanced index, which is based on financial adviser fund recommendations. (NB These figures refer to the past and that past performance is not a reliable indicator of future results).
Are all ethical funds truly ethical?
One of the trickier aspects of planning an ethical investment portfolio is performing due diligence on the underlying companies held within a fund. Certain funds are ‘greener’ than others and even some financial institutions that you hold ISAs or bank accounts with, along with pension companies or even your workplace pension provider, could in fact be investing money into areas you would rather not support. Although controlling who you give your money to directly is easy to manage, matters become much harder when your money is put into the hands of third parties.Even so-called ‘ethical’ providers may not be as ethical as you might expect and there have been some instances brought to light in which customers are failing to get the green/responsible investment they thought they’d signed up for.
Short of spending hours of your time researching and contacting all of the financial institutions you are involved with, and thereafter moving your funds to those with a more favourable approach, there isn’t an easy way to address this. The financial advisers and technical research team at Gresham Wealth Management have a great deal of knowledge and insight into the ethical stance of funds and can therefore ensure that clients’ wishes in relation to ethical preferences are followed.
With a growing number of people taking a stance on environmental and other issues of public concern, it seems that ethical investing is only set to develop as a way of approaching stocks and shares investments. Gresham Wealth Management have an ethical investing questionnaire that seeks to ascertain a client’s preferences in relation to investing, and in particular, the strength of their ethical stance on a number of key issues of concern.
For further advice or assistance in relation to ethical investing, Gresham Wealth Management’s team of IFA’s will be happy to assist. Contact us here.
NB The value of your investments can go down as well as up, so you could get back less than you invested.