Ethical investments used to be a highly personal decision but while you may still have specific ethics and motivations that guide your investment choices, there are a growing number of funds that promise to be sustainable, eco-friendly or otherwise ethical.
With about 200 such funds in the UK alone, there’s plenty of choice even within the ethical and sustainable investment market itself.
But there is also still some disagreement as to the precise definition of ‘ethical’ or ‘sustainable’ in the context of investing – so you still need to do your research before settling on a fund that matches your own motivations.
Ethical investments vs. the overall market
When specifying ethical investments, you limit your options compared with a whole-market investment strategy – and that can naturally mean missing out on some opportunities in the short term.
But sustainable stocks by definition have sustainability on their side, and with investors and consumers alike becoming only more environmentally aware as time goes by, that arguably makes sustainable shares the sensible option for the longer term.
The UK in particular is factoring this into investment strategies, according to data published by Eurosif, Europe’s sustainable and responsible investment organisation.
In late 2018, the organisation reported that €2.2 trillion of UK assets already exclude ‘harmful industries’ such as arms and tobacco, ranking a narrow second to Switzerland, while the UK is currently leading in terms of growth of ethical investing.
More than three quarters (76%) more investment decisions now include consideration of environmental, social and governance factors (ESG) in the UK, compared with a Europe-wide growth rate of 60%.
ESG in action
Recent years have shown the importance of ESG in determining changes in share prices, with notable examples including Volkswagen.
Following the revelations of results rigging in the carmaker’s laboratory emissions testing, the stock value of VW fell sharply – a clear and direct consequence of environmental concerns, whether among investors themselves or among the company’s customer base.
Investing in fossil fuels is also becoming more risky, and that includes not just company shares in oil and gas producers, but also markets like the FTSE 100 which derives much of its value from the petrochemical industries.
How to invest ethically and diversely
The continuing growth in the number and variety of ESG stocks and funds is making it increasingly easy to adopt a diverse ethical investment strategy.
Broad ESG funds cover most, if not all of the traditional asset classes – and ironically, many derive some of their value from cleaning up after the unethical industries, for example recovering and recycling valuable materials from former landfill sites.
For investors this is helping to remove some of the restrictions on ethical and sustainable investment, so that you can use more traditional strategies without having to buy traditional stocks and shares.
The way to do this is to decide on your own definition of ethical and/or sustainable, and then apply this to the shares and funds that are currently available and which promise good value in the months and years to come.
ESG vs. ethical investment
Finally, be aware that some people disagree about the similarities and differences between ethical investment and ESG.
Whereas many funds may include an element of ESG in their strategy, ethical investment can be much stricter, and within this some funds may be even stricter still.
These different degrees of ‘ethical’ can all yield positive returns, although with less history behind sustainable funds, it can be harder to predict performance over the short term.
But hold on to those investments for longer and the evidence suggests you should do relatively well – a report from the Morgan Stanley Institute for Sustainable Investing claimed that after seven years, sustainable investments usually meet the performance of their traditional counterparts, while some exceed it.
Five ethical funds to start with
Of course it is your decision what to invest in and the selection criteria you use to make that decision, but as a starting point here are five ethical funds to look at:
- FP WHEB Sustainability focuses on clean energy, sustainable transport and social ethical challenges including education and healthcare.
- Impax Environmental Markets addresses themes like energy efficiency, pollution control and water technologies.
- iShares Global Water UCITS ETF is an exchange-traded fund covering 50 of the world’s largest water companies.
- Kames Ethical Cautious Managed rejects companies involved in alcohol, gambling and tobacco while including a combination of bonds and equities.
- Liontrust UK Ethical invests only in UK shares based on the fund managers’ rules and requirements for environmental and social responsibility.
There are hundreds more options, from funds partially driven by eco-conscious decisions, to those that claim 100% ethical investment strategies – allowing you to choose a level of specificity, risk and potential return that suits you.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.