Guide to Ethical and Green Investing

 

What is ethical and green investing?

There are many different terms used when people talk about green and ethical investing, all of which have very different approaches. All of them, however, take into account longer term social, cultural or environmental factors. Here we list the main terms used to describe green and ethical investing:

 

• - ‘Ethical investment' generally means that you are screening out certain parts of the market, such as tobacco. This approach caters for those investors who have a strong social conscience.

• - ‘Responsible investment’ tends to mean that the Investment Manager takes into consideration various environmental, social and governance(ESG) issues when investing in a company. This is not prescriptive and does not necessarily lead to an investment choice which would fulfil a social conscience.

• - 'Sustainable investment’ means that the fund manager is looking to invest in businesses whose business model is repeatable in the long term. Again like responsible investing the investment outcome will very much depend on the attitude of the fund manager and how they define ‘sustainability’, rather than to social conscience.

• - ‘Environmental or green investing’ is like ethical investing, much easier to define than 'responsible' or 'sustainable' investing. The fund manager will look to businesses operating in areas such as water, waste, energy efficiency and clean energy to find positive solutions to environmental problems.

 

The types of stocks which each style of investing allows the fund managers to invest in is almost as wide as the investment market itself. While the funds these days tend to be grouped together and described as ‘green and ethical’ funds, this does not mean they are similar, or have similar goals.

 

A brief history of green and ethical investing

Originally a religious pursuit, ethical investing can be traced back to the 18th century, where “sinful” companies were avoiding, such as those involved in the production of alcohol. Ethical investing gained momentum in the 1960s as more American investors wanted to avoid Armaments companies involved in the Vietnam war.

 

In the UK, ethical investing took off in 1984, and the amount of money invested in these kinds of funds has been growing ever since. Currently there is £21.8bn invested in UK ethical and green funds (Worldwise Investor Quarterly Report).

 

The latest addition to green and ethical funds has been 'thematic'. These funds tend not to have ethical screens but focus on particular sectors such as Water, or Agriculture. These funds tap into the demographic and industrialisation megatrends which are changing the world we live in and while such funds may suit an ‘ethical’ investor, they do not start from the premise of excluding tobacco, or armament companies. For a more detailed history, see “History of Green, Ethical and Responsible Investing”.

 

Why invest in ethical and green funds?

Investor attention needs to move away from ‘ethical screens’ and to the difference green or ethical fund managers could have on long term investment performance, with their wider decision making process, and different perspectives on risk and market opportunities.

 

Funds which have ‘ethical screens’ will often take both a responsible and sustainable approach to investing, which adds value over and above simply screening out parts of the market. Equally some environmental funds operate minor ethical screens, which often do not impact on stock selection due to the nature of the funds in question.

 

The Worldwise Investor philosophy is that an investor should consider including 5% to 10% of their portfolio into green and ethical funds, depending on their own world view to help smooth investment returns over the longer term. This is because fund managers in this space are looking at resource and cultural issues in ways that the normal investment market is not.

 

Many investors today are making the most of the opportunities created by resource scarcity by investing in mining or energy companies. But why not invest in companies which help to use the resources we mine more efficiently? Or consider that climate change will impact on future profits and invest accordingly?

 

In the future investors will need to factor in external constraints and political decisions to a much greater extent that they do today. At Worldwise Investor we believe that green and ethical funds will not just be a positive part of global change, but will also benefit financially as the fund managers have a greater chance of factoring in the mispricing of businesses in the new world.

 

Five steps to ethical and green investing

1. Think about your needs and ethical concerns.

When considering ethical or green investing, you first need to know what is important to you. Are there industries you wish to avoid when investing? Are you looking for high levels of risk? Are there specific industries that you want to invest in? Think about these key questions, and discuss them with your financial advisor if you want to go down the ethical or green investment route.

 

2. Understand the different kinds of investment funds

Do you want a 'green', 'ethical', ' responsible', 'sustainable', or 'environmental' fund? Do you want a fund that’s actively or passively managed? Again, speak to your financial advisor for more information on these, and to decide which style is best for you. You can learn more about these using our explanatory articles in the knowledge section.

 

3. Use the Worldwise Fund Library to compare ethical and environmental investment funds

Once registered with Worldwise Investor, you can use the Worldwise Fund Library to compare 132 investment funds, many of which have ethical screens or are environmentally focused. We also have thematic funds such as Forestry or Water. On the fund library you can see the type of fund and its past performance, and can filter for ethical screens or for certain themes. When you click on the fund, the fund view page appears, showing the fund summary, objectives and other important information about the fund. This is a powerful tool to compare investment funds in the ethical, environmental and thematic space.

 

4. Get financial advice

If ethical or environmental investment is something that interests you, there are financial advisors that specialise in these areas. An IFA can offer advice on which investment funds to use, and can help you with the transactions to invest in them. You can find a list of IFAs on the EIRIS website.

 

5. Receive Worldwise Investor Alerts

When registered to Worldwise Investor, you can subscribe to themes or funds and then when a news article is produced relating to them, you will be informed. These alerts will keep you up to date with your funds and the industries they are invested in.

 

Useful links

Worldwise Investor: History of Green, Ethical and Responsible Investing

Worldwise Investor: Fund Library

Worldwise Investor: Themes