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What counts as an ethical investment?

28th August 2018

Ethical investment funds incorporate environmental and social factors when selecting companies to invest in, in addition to the objective of achieving a competitive financial return. In other words, it involves investing in companies that are in line with your ethical principles. When building ethical investment funds, there are two methods of vetting companies before you make your choice:

 

Negative screening

Negative screening is avoiding industries and companies which have a negative impact on the community and/or environment. For example, you may wish to avoid the coal, oil, tobacco, gambling and unsustainable logging industries. Or any businesses that produce harmful products, exploit resources or abuse human rights in order make their profit.   

 

Corporate engagement

You can invest in organisations that you think could improve company practices to become more ethical with the condition of your investment being a certain level of involvement in organisational decisions. The fund managers become involved with the companies they invest in with the aim of improving corporate responsibility. They attend meetings with senior management and vote at AGMs. For example, a company making paper products may be encouraged to use sustainable suppliers and improve their products recyclability.

 

The Ethical Investment Spectrum

There are several investment funds that adhere to ethical standards. Some ethical funds enforce less rigid environmental standards than others. Ethical investment funds are sometimes defined on a scale from ‘light green’ to ‘dark green’.

 

Dark Green Ethical Funds

These have the most rigid ethical and environmental standards. Dark green funds automatically exclude all companies involved in tobacco, armaments, gambling, fur trade and pornography industries. They will also exclude companies with a poor compliance with human rights, for example those that use child labour or employ suppliers that do so. Dark green funds also focus on environmental and climate change issues.

 

Medium Green Ethical Funds

While stricter than light green funds, these allow some exposure to companies with poor workplace relations, or companies responsible for ozone depletion.

 

Light Green Ethical Funds

In contrast, light green funds balance various social, environmental and ethical criteria and select the companies scoring highest overall. These funds may invest in industries such as banking, oil or pharmaceuticals that would be shunned by many of the stricter ethical funds. Even so, they’ll likely shy away from firearms and military aerospace companies that cause direct harm to people.

 

How can I trust that a fund really is ethical?

Speak to a financial advisor to find out what its top holdings are, and what percentage of its portfolio is held in environmental or social stock. If you are happy to do business with any of the companies held by the fund then the fund matches your own ethics. If you are not, look elsewhere.

 

An ethical fund is an investment vehicle that will only invest in companies with a social, moral or environmentally responsible agenda. Investors wishing to invest their money ethically are not short of options. More and more active fund managers are choosing to make ethical investments targeting companies with sustainable and long-term strategies. There are now more than 90 ethical investment funds available; a decade ago there were just a dozen. This is driven by growing public interest in issues such as climate change, and an increasing corporate focus on socially responsible conduct.

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