How to Invest your Money Ethically in 2021
Ethical investments are on the rise as pressing global issues such as climate change continue to influence our lifestyles, behaviour and the way we spend, save and invest our money – guest post by Charlotte Miller.
Whether you’re looking to switch investments from traditional portfolios or want to prepare for retirement with sustainable pension investment schemes, ethical investments are a compelling option.
The Rise of Sustainable and Ethical Investment
Once considered a fringe concept reserved only for hard-line environmentalists, activists and futurists, ethical investment is now very much in the vogue.
According to Which? there are more than 2,500 ethically-themed investment funds across Europe, all of whom provide some sort of sustainable or ethical guarantee on their investments.
Evidence suggests that these investment funds also perform as well as their traditional counterparts.
A Morningstar report analysed 745 sustainable funds and compared them to traditional funds. They found that there was no value compromise in sustainable investments and that sustainable investments were more likely to outperform their traditional counterparts.
“Average returns and success rates for sustainable funds suggest that there is no performance trade-off associated with sustainable funds. In fact, a majority of sustainable funds have outperformed their traditional peers over multiple time horizons”.
So what’s have you got to lose by making ethical investments in 2021?
Reading Between the Lines of Ethical Investments
As ethical investments have grown in interest, they’ve become marketable entities and are prone to jargon and mislabeling. You can’t take the bold claims of many funds at face value and it’s down to the investor to dig down into the exact securities used to raise capital in financial markets.
Ethical investment is labelled in different ways, the three most common labels being:
- Environmental, Social and Governance (ESG) investing.
- Impact Investing
- Sustainable/Ethical Investments
The conditions of these investment types or strategies are all highly subjective. For example, ESG investing takes into account environmental, social and governance-related factors. ESG funds focus on providing an investment instrument that is not entirely based on economic performance, but also takes into account a company’s carbon performance, climate change adaption, etc.
Ethical funds often paint with a broad brush, including securities based on PR statements or press releases that declare opposition to ethical issues without actually securing a track record in combatting them.
Impact investing is more direct, providing an investment opportunity that yields direct positive ethical impacts for societies and environments. Again, how is this defined?
Funds labelled simply as ‘ethical or sustainable’ sift through different opportunities to identify those associated with positive moral values or environmentally sound principles.
As you can see, these terms are pretty vague, subjective and subject to mislabeling. Drilling down into each fund individually is very important if you need clarity on exactly where your money is going.
Even traditional oil companies might tick the boxes for ‘sustainable’, ‘ethical’ or ‘responsible’ investment. If their CEO declares that climate change exists, and pledges to add wind and solar power to their energy network, then that might be enough.
The practice of investment funds artificially aligning their investment types to ethical or sustainable principles is greenwashing.
A 2019 report by wealth management company SCM Direct identified many so-called ethical investment funds that were still packed full of ‘sin stocks’ associated to weaponry, gambling, tobacco, alcohol, fossil fuel and other distinctly unethical stocks and securities.
For example, the Ethical Cautious portfolio by Wealthify was comprised of 52% government bonds (with the US and UK governments), who receive massive revenue from gambling, tobacco, alcohol and weaponry.
Their excuse? That governments also provide ‘healthcare, education and infrastructure’.
This is a typical example of how definitions can be warped to market investment products as ethical, sustainable or eco-conscious when they’re not.
Individual Research is Paramount
We all live different lives and the lengths we go to live them sustainably and ethically vary hugely.
Some individuals and families go as far as relocating from the UK, especially after retirement, to ensure that their money is spent in economies with fairer tax structures and direct positive impact for local economies.
It can be difficult to reconcile the Western lifestyle with truly sustainable principles and often, we must accept that our personal measures are just ‘good enough’.
For those looking for sustainable investments for now and the future, there’s no trade-off for gritty individual research.