Investing may be the best way to build wealth, but there are an increasing number of people who are selective about their investments. Investing in armaments and tobacco used to be at the heart of many portfolios.
Many people now prefer not to include them and want to build an ethical investment portfolio they can be proud of.
Responsible investing has come a long way in the last 30 years. The UK’s first mainstream ethical investment fund was launched in 1984 by Friends Provident, and at the time it was rather unfairly called the ‘Brazil fund’ – because you would have to be nuts to invest in it.
Whether it is termed ethical, responsible, or sustainable investing, the aim is the same. It’s investing your money in businesses which have some intention of making the world a better place.
Companies which cannot demonstrate social responsibility, who deal in tobacco, who fail to protect human rights, the environment and animals are all experiencing a backlash from investors. Those who are in the news for corporate tax avoidance, excessive pay packages for chief executives, and banks involved in the latest scandals are increasingly finding themselves shunned by ethically-minded investors.
In the past 24 months, we have seen an enormous increase in demand for ESG strategies. Nearly £10bn was invested in socially responsible funds in 2014, according to the Investment Association. It’s a small slice of the overall stock market, but although, the UK remains some way behind other countries in Europe in terms of the amount of money given over to ethical investing, it is growing fast.
There are signs that this move to ethical investment is actually having an effect on corporate behaviour. Whether or not it persuades them to change their ways, the UK’s ethical market is now worth £38bn, with a recent report showing it soaring by £3bn in the last year alone. Some sectors are positively booming, with electric and hybrid car sales up 40% over the year to come close to £7bn, and solar panel spend up nearly 25% to £716m.
It used to be that ethical investment could only be done directly, that is by buying shares in companies judged to be ethical. It is radically different today. There’s a wide market of responsible investment funds – and experts who invest ethically. You can actively seek out investments in wind and solar energy or bamboo plantations, for example, or in a broad based fund which will simply ensure that companies and investment classes who don’t meet ethical criteria, such as tobacco companies, weapons and big banks, for example.
Many funds exist, and can be invested in through a Stocks and Shares ISA or SIPP. The essential point is “it’s important investors understand the different nuances of the funds, so that they can pick the best fund to match their own views,” says Darius McDermott of Fund Calibre.
These days there is little indication that ethically-biased investment funds will necessarily make less money than their less high minded equivalents. Under some circumstances they can do considerably better, as during the recent downturn in the oil sector. Responsible funds which avoided battered oil stocks have done well.
This is a fortunate outcome for ethical investors, and should be seen as a matter of luck rather than an intrinsic benefit of ethical funds. Responsible funds can be less well diversified, because they are excluding certain parts of the stock market, and so can be volatile when conditions work out differently.
However, one reason for their popularity is that they are often skewed to mid-caps and smaller companies which have delivered much stronger performance than the FTSE 100 in recent years,
If you would like to look more closely at ethical funds, or any other type of investment, please contact our professional team who can develop a portfolio that’s right for you.
The value of investments can go down as well as up and you may not get back the amount invested.