Let's talk about ethical investing

Becoming an ethical investor is a great way to do your bit and put your money behind your morals. But what else should you know?

We’ve all heard of investing. Investing is essentially lending money to, or buying shares in, an organisation, with the aim of getting back more than we put in. But what about ethical investing?

In a nutshell, this term refers to investing in line with your moral compass.

For some, this means excluding investments in industries you don’t agree with, for example weapons, gambling or fossil fuels or those that conflict with your religious beliefs. This category of ethical investing is often called negative screening.

Under the ethical umbrella, investors may also focus on ‘socially responsible investing’ or ‘ESG investing’, which stands for Environmental, Social, and Governance. This means they may only hold investments that meet certain environmental and social criteria, or with organisations that demonstrate strong governance.

You may also have heard of sustainable investing, which is often used synonymously with ethical investing. Sustainable investing is choosing investments that deliver environmental and social benefits, as well as reducing or eliminating investments in harmful sectors and organisations.

There’s also a style called ‘Impact Investing’ which aims to go further still and invest in positive, measurable social and environmental change.

But what else should you know before you start? Read on for some top tips!

Understand what ethical investing means to you

As we have described, there is no one definition of ethical investing, and lots of versions exist. It’s worth taking the time to think about what values are important to you when it comes to choosing investments.

Are there certain industries you want to avoid? Or do you want to prioritise specific social or environmental causes? Defining some clear criteria for yourself will help you filter through the options available and find ones that are right for you.

Read the fund and portfolio documentation

If you are investing via funds or portfolios that hold many underlying investments, make sure you read the fund documentation including the Key Information Document (KID) and Fund Factsheet.

These will tell you what the fund is trying to achieve, what it will and won’t invest in, the top 10 holdings, and how the management team go about choosing their investments. Don’t rely just on the fund title alone.

Do your company research

For more advanced investors, if you want to invest in individual companies, you can find out more about their ethical and sustainable policies and procedures on their website and independent investment resources like Morningstar and Marketwatch. You can also see individual company ESG ratings on Sustainalytics and CSRhub.

Know what you are investing in

The ethical credentials of your investments are one of many factors to consider when investing. As with any investment decision, it is key to understand what you are investing in. You’ll also need to know what fees you will pay, the risks involved in the investment and how the investment has performed in different market environments.  
For funds and portfolios, you’ll want to know how they are managed and what they are trying to achieve. You can find this information in fund documentation,company reporting and accounts, or on the platforms you are using to invest.

Beware of greenwashing

‘Greenwashing’ in investing is where firms make misleading claims about the environmental or sustainable benefits of a fund, portfolio or investment. This can be done in many ways.

For example, they may label a fund green or ethical without an underlying strategy that supports this title or exaggerate the sustainable credentials of an investment without supporting data or evidence.

Until there is stronger regulation and agreed definitions of ethical, sustainable and green investments, you’ll need to do your own research to ensure any investments you choose meet your personal criteria.

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.