60 second guide to ethical investmentsKey facts to mark National Ethical Investment Week

17 October 2011

What you need to know about ethical money

Investment in Britain's green and ethical funds has reached a record high of £11.3bn

As this year's National Ethical Investment Week (NEIW) gets underway, Which? Money gives you a quick rundown of key ethical investing facts.

What is ethical investing?

Ethical investing means considering ethical issues as well as your own financial goals when making personal financial decisions. It can refer to areas of finance where the environmental, social, governance and ethical principles of the investors influence their investment decisions.

Ethical issues could include climate change, arms dealing, human rights abuses, oppressive regimes and world poverty - or other issues you may feel strongly about.

How does ethical investing work?

There are three main approaches to ethical investment, which can be used in combination or on their own:

Screening

An investor might want to avoid companies investing in arms manufacture, tobacco or nuclear energy. This is known as negative screening, where companies are ‘screened out’ from investments because of their involvement in certain activities deemed negative. 

However, a different investor may want to support a company involved in projects with a positive social or environmental impact, such as renewable energy. This is known as positive screening - where companies are ‘screened in’ for their positive contributions to society and the environment.

Preference or best-of-sector

A preference or best-of-sector approach applies social, environmental and ethical guidelines to give a preferred selection when all other factors are equal. For example, an ethical fund might have criteria that enable it to invest in the oil and gas sector, but will only invest in those oil companies that are ‘best in their sector’, meaning these preferred companies have better records on the environment and human rights than other companies in their sector.

Activism

The third approach is shareholder activism, in which investors attempt to positively influence corporate behaviour. This approach doesn't have to exclude, include or prefer companies. Instead, the active investor or fund manager encourages companies to adopt social and environmental best practices, often through meetings with senior management or through voting at annual general meetings.

What are 'green' ethical funds?

Ethical funds are often defined according to their 'greenness', or shade of green. The ‘green scale’ is commonly used to illustrate the ethical credentials of a fund or company, but is essentially akin to the screening approach. 

For instance, ‘dark-green’ investing aims to avoid all companies in certain sectors, such as arms, tobacco and fossil fuels. A ‘light-green’ fund might invest right across the stock market, but only in those companies working to improve their ethical performance.

How ethical are ethical funds?

Ethical funds vary in their investment approaches: Some have detailed policies which make very clear what kind of companies they will or won't invest in. Others can be vague and lack detail. 

It's important to check the policy of each fund to ensure it fully addresses your ethical concerns. The better funds should be able to provide concrete examples of how they are making a positive impact

I'm looking to invest - which ethical fund should I buy into?

If you're interested in investing in an ethical fund, be sure to get expert advice. The Ethical Investment Association is an association of around 50 independent financial advisers (IFAs) from around the UK, dedicated to the promotion of green and ethical investment. Its members aim to increase access to green and ethical investment advice for individual investors. 

Ethical research company Eiris also has a searchable directory that can put you in contact with advisers specialising in ethical investment.

Before you invest in an ethical fund, be aware that the same considerations apply as with any investment. These include your attitude to risk, timescale, whether you're likely to need to access the fund, fund management fees, your tax status and the financial strength of the fund provider. As with all share-based investments, your investment can go down in value as well as up.

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