LIKE the idea of going green with your money, but not sure where to start? Now could be the time to think about ethical investing.
More and more ordinary people are using their Isas (individual savings accounts) and pensions to help do their bit for the planet.
The flow of money into ethical and sustainable investment funds (collections of companies) have risen significantly in the past few years. It is a rapidly growing area of the fund market.
In the past, investing with a clean conscience has often meant settling for lower returns.
But as many ethical funds are now performing well – with some outperforming global markets – there is no longer a price to pay for having morals and taking an ethical stand. Here we take a closer look.
What is ethical investing?
Ethical, green, or socially responsible investing offers the possibility of making money in a way that’s in line with your values or beliefs.
You can do this either by excluding certain harmful business activities, or by including beneficial ones – or both.
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Becky O’Connor, head of pensions and savings at investment platform, Interactive Investor, said: “This could mean avoiding tobacco companies because the issue of smoking causing cancer is important to you, and maybe investing in healthcare instead.
“Alternatively, it could mean avoiding fossil fuels and investing in renewable energy instead, because you want to help save the planet.”
Ethical investing can also involve investing in activities or companies which have a measurable positive social or environmental impact.
Often referred to as ESG investing, this refers to three key criteria – the environment, social issues and governance – which all measure how investing in a company impacts on the planet or society.
According to figures from the Investment Association, UK savers put almost £1billion a month on average into responsible investment funds in 2020.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Against the backdrop of a global pandemic and uncertainty about our futures, it seems investors have been zeroing in on their moral values and concern for the planet.”
What are the risks?
As with any type of investing, there is the risk you may get back less than you put in, but there are no specific risks that don’t apply to other non-ethical approaches.
If you are particularly picky about what you invest in, there’s a risk you might end up not sufficiently spread out across asset classes, sectors and parts of the world.
O’Connor said: “You might have to take more care to ensure you are properly diversified – so not all your eggs are in the same ethical basket.”
Your investment could also experience periods of higher volatility if you are excluding whole sectors of the market that don’t meet your criteria.
Damien Fahy from personal finance site, Moneytothemasses.com, said: “For example, if you exclude alcohol, cosmetics and tobacco, you would be avoiding a lot of consumer-focused stocks that tend to do well in market downturns. This could unbalance your portfolio.”
Ethical funds tend to have a higher exposure to technology and smaller companies and less exposure to oil and gas stocks, or industrials.
But while ESG can mean putting more of your money into smaller, more volatile companies, you can reduce risk through diversification.
How do I go about it?
If you like the idea of taking the green option, you can pick ethical investments through a stocks-and-shares Isa, or through a self-invested personal pension (Sipp).
You can also run searches for ethical funds on most platforms and fund supermarkets.
Fahy said: “One route is to invest in ethically-run funds via a fund supermarket, such as Hargreaves Lansdown. “If you’re not sure where to start, you could have a look at some recommended fund lists.
"Interactive Investor has an ethical ‘best-buy’ list, the ACE40, which shows fund options from across a number of different sectors.”
Remember, you should always try and build up a nest egg of cash savings to fall back on before you start investing.
“My ethical investments get 6% returns”
THOMAS Hague wants to grow his money while also aligning his investments with his values.
The 47-year-old lives in Manchester with his wife and children.
Until recently, Thomas was investing primarily in individual shares, along with a few funds. He had been screening for things such as tobacco, arms, gambling and doorstep lending.
Earlier this year, he moved all his money into ethical funds. He invests his Isa via Interactive Investor, and makes use of the platform’s ethical ‘best-buy’ list, the ACE40.
“This list has been really helpful, and makes things a lot easier to manage,” says Thomas, a supply chain manager. “I have a base requirement for funds to take environmental, social and governance-related (ESG) factors into account. At the same time, I want to invest my money in line with my principles. This means not investing in certain areas, such as tobacco.”
Over the past three or four years, Thomas’ ethical investments have generated returns of around 6% a year. Given that ethical indices can outperform their conventional indices over longer periods – and have done so over the past few years – he is hopeful his investments will prosper over the long term.
Thomas adds: “I want my money to reflect my values. This helps me sleep better at night. With ethical investing, there is a broad choice of investment options that covers different geographies and risk appetites. Investing in this way doesn’t mean having to settle for lower returns.”
In addition to investing his Isa ethically, Thomas has also gone for the ethical option with his pension provider, TPT Retirement Solutions.
Do I have to invest big sums of money?
While you might think that ethical investing is only for the rich, you don’t need a lot of money to get started.
Most platforms will let you access a basic selection of more ethical funds for around £50 a month – or in some cases, just £25. Remember to check for charges.
Equally, with a robo-adviser – a digital wealth manager which does the work for you – you can get started with even less.
Fahy said: “Robo-advice services, such as Wealthify, will allow you to invest in their ethical portfolios from as little as £1 a month. These services will also make all the investing decisions for you.”
Remember to check the charges on robo-advisers, too.
Can you make money?
Just because you’ve chosen to invest ethically, you don’t have to settle for lower returns.
O’Connor said: “You absolutely can make money and more importantly, you should expect to.
“This isn’t charitable giving, it’s an investment. It has to deliver for you financially, as well as giving you a good feeling.”
For example, you could invest £25 a month in an ethical fund (MSCI USA SRI index) and based on data from the past five years you could get £2,455 in five years time, according to Myron Jobson at Interactive Investor.
Compare that to an equivalent fund (MSCI USA IM) and you get £2,297.
How do the returns compare?
Many sustainable funds have performed extremely well in recent years.
Streeter said: “This has been helped by their focus on strongly-performing sectors, such as technology and healthcare, and lack of exposure to weaker sectors, such as oil and gas.
"The rush to safety we saw when the pandemic hit also benefited companies with more positive sustainability profiles.”
According to Moneyfacts, the average ethical fund has returned 27.06% over the last year (from May 1, 2020- May 1, 2021), slightly ahead of the 23.6% average for non-ethical funds.
The data analyst found that ethical funds have also outperformed over three years, with the average ethical fund returning 34.94%, compared to the 21.1% average for non-ethical funds.
And over five years, the average ethical fund has returned 73.89%, compared to the 52.75% average for non-ethical funds.
Separate research from the Good Investment Review, published by Good With Money and 3D Investing, shows since 2016, the ethical UK equity funds monitored have brought average returns of 48.44%, compared with 37.07% for all funds in the sector.
Meanwhile, the ethical global equity funds monitored have returned an average or 98.99%, compared with 90.67% for the sector.
Fahy added: “During 2020, all of Wealthify’s ethical plans outperformed its equivalent non-ethical plans.
"You should not place too much emphasis on one year’s returns – especially a year as unusual as 2020 – but it demonstrates that investing ethically doesn’t have to mean having to accept lower returns."
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