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What is the importance of ethical investing?

The ethical investing universe is gathering strength and gaining momentum. You could argue we are starting to see the importance of ethical investing. This is a good thing because as the ethical sector grows, it will become more powerful and more influential.

If it continues growing, eventually, it could be considered the mainstream, and fund managers may be influenced not to invest in anything unethical.

The long term consequences can only be for the good of mankind.

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The role of millenials

Wishful thinking maybe but the force is gathering pace. This is thanks in no small part to the growing interest from millennials. Whilst the younger generations may be facing up to the effects of climate change and numerous other environmental, social and governance issues, they are also acknowledged as having far less money to invest than their parents and older generations. This is however changing.

As millennials inherit money and get older themselves, more money is being invested in socially responsible investments, which can only be a good thing. The popularity of investing in ethical and socially responsible investments is important for the sustainability of the market.

Can you make money?

The ultimate aim when investing is to get a return over the long term, preferably above the rate of inflation. It is therefore important to choose your investments wisely and not pick the first ethical investment you see advertised.

This can be a little difficult for the DIY investor, simply because there is so much choice. Some investors have put their faith in an advertised investment and some have indeed been lucky. Others would however prefer to keep luck out of the equation and go for a more scientific approach. If you are the latter, it would be worth your while engaging the services of an Independent Financial Adviser, who would have all the research tools available to help you make an informed choice.

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. You should be able to invest a regular monthly amount or a lump sum or both. You should also be able to transfer existing ISA or pension holdings into your new ethical investment.

Ethical funds operate in the same way as conventional managed funds, in that they purchase a basket of shares in a chosen sector. However, before deciding to invest in a company’s shares, an ethical fund manager would run checks on the company to find out if it had interests in many positive and negative criteria.

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

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

Why the past isn’t a good indicator of the future

Historically, ethical funds have lagged behind conventional funds in performance and are considered higher risk. This is 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 that ethical funds can vet companies and make decisions much more quickly resulting in superior returns.

Indeed, some ethical funds have out-performed conventional funds and the choice is growing. The latest thing is ethical trackers, which are electronic and low cost.

So can you have your cake and eat it too? Yes, you can. Just make sure you vet that cake well before biting.

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