Updated: Oct 28, 2019
Is it possible to make money and make a difference? The stereotype of an investor might look like Gordon Gekko and be associated with character traits such as callous, materialistic, and greedy. However, investing is changing, perhaps driven by accessibility through fin-tech innovation in combination with value-oriented millennials.
Ethical investing is a term for financial investment which excludes companies, organisations, and projects involved in activities harmful to society or the environment and seek those who operate in a sustainable way. Other names include Environmental, Social and Governance (ESG), Sustainable Investing and Social Impact Investing (SII).
Funds are composed by either negative screening, or positive selection, or a combination of both.
Negative screening describes the act of filtering out harmful activities. Such activities include ‘sin stocks’ (gambling, tobacco, adult entertainment, weapons), and can further include, depending on fund provider, filtering out any company, organisation, or project involved in animal testing, intensive farming, nuclear power, genetic engineering, deforestation, and poor human or labour rights.
Positive selection is when proactively seeking to invest in companies who can prove real commitment to making a positive impact in the areas of environmental sustainability, social justice or corporate ethics.
There are variations in how these are put together and how “strictly” ethical investing is defined. Some providers tolerate 10% profit from harmful activities, whereas others practice a zero tolerance. There is also a difference in how thoroughly monitored companies in a fund are on a regular basis.
Can it compete with conventional investing?
As with all investing, returns are not guaranteed and you could get back less than you put in. Unfortunately, there’s no way of knowing how the stock market will behave in the future, but experts are overall positive to sustainable investing.
Forbes wrote recently that “the potential of making returns from impact investing is comparable to traditional investments”. Helena Morrissey, head of personal investing at Legal & General Investment Management, argues that “companies with better scores on certain indices, like equality, treatment of their employees or carbon footprint, do tend to perform better over the long run.”, explained by the fact that the world moves towards more sustainable solutions, where e.g. investments in electrical producers will generate higher returns than those of gas/diesel ran car producers. She continues “Eventually, all the mainstream money will be invested on this basis because it will be very risky to do otherwise.”