Can you profit from investing ethically?
What is more important to you when you invest money? Your principles or your profits? The term “Ethical Investment” in itself has been considered an oxymoron for many years. Is it possible to have your cake and eat it by making profits through ethical investing?
One theory is that companies making a positive contribution to the world, people and wildlife run less of a risk of rows with regulators and governments; all if which can have a detrimental effect on a company’s share price. BP’s well documented environmental disasters are one such example of the consequences of irresponsible social action. Environmentally conscious firms should therefore have better long term prospects, thereby leading to sustainable profits.
How to invest?
The most popular route to investing ethically is through a managed fund, via an investment vehicle like a stocks and shares ISA or personal pension. These operate in the same way as conventional managed funds, in that they purchase a basket of shares in a chosen sector. However before making a decision to invest in a company’s shares, an ethical fund manager will run checks on the company to find out if it has interests in a number of positive and negative criteria. Here are some of them:
Examples of positive criteria:
- Companies involved in pollution control
- Companies involved in conservation and recycling measures
- Companies or organisations that promote ethical employment practices
- Companies that promote sustainability including mitigating climate change
Examples of negative criteria:
- Companies involved in armaments and nuclear weapons manufacture
- Companies involved in animal exploitation and testing
- Alcohol and tobacco promotion
- Companies that participate in or promote gambling, and or pornography
How ethical is ethical?
This can be a contentious issue. For example, on the face of it, a bio technical company working on a cure for cancer may appear ethical. However, what if that very company works with another company that is involved in testing drugs on animals? Another example may be a company that makes long-life batteries for non-polluting electric cars. The company then goes on to pollute the environment to a significant extent in the process of manufacture. There is always the risk that having too strict criteria could result in a poorly balanced portfolio at best. The worst case scenario would be having no companies left to invest in!
What sort of return can you expect?
Many ethical funds operate on the higher end of the risk spectrum. This is because to invest in ethical companies, you need to buy their shares resulting in a high equity content. Ethical funds invest in other asset classes such as bonds and property but the equity content may well be heavily weighted in smaller companies. As a result, you can expect some volatility and should get a financial adviser to assess the risk of the fund prior to investing.
Historically, ethical funds have lagged behind conventional funds in performance, partly because of choice limitations and because the vetting process can take some time to go through. Analysts have commented that by the time an ethical fund is ready to invest, the horse has already bolted! This is changing. Advances in technology and superior market intelligence means ethical funds are able to vet companies and make decisions much more quickly resulting in superior returns. More recently, some ethical funds have out-performed conventional funds. This is because, many ethical fund managers stay away from the oil and gas sector. As luck would have it, this sector has been hit hard by the drop in the oil price resulting in out-performance.
So can you have your cake and eat it too? Sure you can. Just make sure you vet that cake well before biting!
Akwasi Duodu, Independent Financial Consultant, Sterling & Law.
Note: The value of investments can go down as well as up and it is possible to get less back than you invested.