Wednesday, 24 April 2013

What is Ethical Investment? Ten Tips for First Time Ethical Investors

Ethical Investment: A Beginner’s Guide to Making a Profit without Sacrificing Your Principles

Research shows that the forward trend in investment is towards what is termed ‘ethical investment.’ But what exactly counts as ethical investing? It seems that you can now make a profit without compromising your principles or the future welfare of the planet.
If this interests you, then you are in good company with some 85% of new investors looking seriously into a variety of ethical schemes.
But, how did it all start? And anyway, what is an ethical investment? It’s worth considering these questions briefly because, as with any investment, you should think and plan carefully with as full an understanding as possible before you decide to roll out your hard earned savings.
This article will give you all the information you need, in easily accessible terms, to understand what ethical investment is, how to go about it and what possible pitfalls you should avoid.
Right, let’s start at the beginning.
Ethical Investment and the Long-term Reality
If when considering how to make your money work hardest for you and your future, you think that your principles matter as much as your profits, then the new and growing trend for ethical investment is something that you should consider very seriously.
Invest Ethically For Sustainable Growth
Ethical investment now promises positive growth in the future.

As our society increases its awareness and concern for social justice and environmental responsibility, these ideas are having a direct impact on the shape and functioning of our financial services.
Financial products from a simple current account through to a broad portfolio of investments, stocks, shares and bonds, mortgages, savings schemes and pensions are being provided on the basis of ethics as well as profits.
This is a good thing not just for consumers with a conscience but also for the providers with principles. In the long term, as environmental and social responsibility become essential aspects of the way we operate for survival, the companies that make positive contributions to social stability, development and environmental protection are clearly going to be the winners. And the long-term is what investment is about.
A Brief History Of Ethical Investment.
So companies that make positive contributions to the world, its people, wildlife and sustainable development not only will have great future security but are much less liable to arguments with regulatory bodies, expensive court actions, industrial actions and product boycotts. All of these things are the day-to-day troubles of 'traditional' investment companies and rightly have a real and increasingly negative impact on their profitability and credibility.
Ethical Investment Funds And The Quakers

George Fox, founder of The Religious Society Of Friends (The Quakers). The Quakers were the first to set up ethical investment funds.
Companies that brand environmental awareness will do better in the long term. For example, a logging company that doesn't have a replanting scheme is just going to end up eating itself by its own tail. One that plants more trees than it fells is securing business as long as there is life on the planet. Companies that do not invest in arms trading - which, let's face it is pretty indiscriminate - are contributing to greater global stability. That's better for business in the long-term.
Interestingly, the movement started in the USA. There were a number of groups, such as churches and NGOs that found they had money they wanted to invest, cumulatively to the tune of several billions of dollars, but didn't want to be supporting oppressive regimes, slave trading or warmongering.
A reaction to the travesty of the Vietnam War gave the movement a boost in the early 1970s when people wanted more control over how their money was being used abroad.
By the 1980s the idea was becoming mainstream. The Quakers were among the first to start open ethical investment funds on a large scale. By the 1990s, most high street banks were beginning to offer at least certain minimal ethical options amongst their product portfolios.
If the trend continues - and there is every indication it will actually accelerate - then by the middle of this century ethical investment will be the norm. Certainly, the wise voices in the know are saying as much. That's where the money is going.
What Is An Ethical Fund?
An ethical fund is very simple to understand. It is an investment vehicle that seeks to ensure that any investment made is exclusively in companies that have a clear socially, morally and/or environmentally responsible agenda.
However, not all ethical funds are born equal. Each one will have a specific set of criteria and regulations regarding the manner by which it determines the companies in which it will and will not invest.
Ethical Investment In A Nutshell
Are An Ethical Fund And An SRI Fund The Same?
In short, an ethical investment fund and an SRI (Socially Responsible Investment) fund are not necessarily the same - but they might be.
In general, an SRI fund will have a less rigid set of criteria. Whereas, for example, an ethical fund is likely to negate all companies involved in arms manufacture or trade, an SRI might only exclude those companies trading with certain regimes. Or, where an ethical investment fund might exclude all animal testing, an SRI might allow investment in such practices for medical science but not for cosmetics.
It's always worth doing your research to ensure that the fund you are investing in does meet your personal criteria. More of that in a minute.
Screening An Ethical Investment Fund.
An ethical investment fund manager will always screen any companies within its portfolio for compliance with its ethical criteria.
Degrees of compliance may be allowed and in terms of environmental investment this is often referred to in terms of relative shades of green. So, a 'light green' company may score highly in some areas but not in others or have a more relaxed and flexible range of policies. A 'dark green' company is one who has a very thorough and principled system by which it operates to maintain its ethical and environmental standards.
The other aspect of screening is based on the idea of positive and negative selection.
The precise definition of these terms will vary from one fund to the next but broadly speaking, positive selection refers to companies being chosen because of the proactive stance they take on 'doing good' as a core part of their business practice. So that might also include its treatment of its employees or its record of charitable giving, for example. Negative selection refers to the practice of excluding companies that are involved in activities that are considered unethical such as the manufacture and sale of weaponry, drugs, tobacco or genetically modified foodstuffs and so on.
Again, as a general rule of thumb, an ethical investment fund will tend more towards negative selection and an SRI may tend more towards positive selection.
Ethical funds work on negative selection - that is, they will exclude companies that invest in "unethical" activities, such as making or selling arms or tobacco. They only invest in areas that fulfil the particular investment company's own ethical requirements for the fund.

Each funding manager will have their own detailed screening mechanisms and so, again, it is always worth doing your research and 'shopping around' to find a fund manager that you think you can comfortably do business with.
Investing In A Climate Change Fund
The climate change fund is a newcomer onto the ethical investment market but is set to be a major player in the course of the next few decades.
Investing In Future Technologies
A Climate Change Fund recognizes the inevitability of the development of future technologies that will offer solutions to the environmental problems of today and wisely invests in them.
This is a particular sub-category of ethical fund that invests specifically in positively selected 'new-technology' industries providing environmental and energy solutions for the future - such as wind farms, wave generators, extraterrestrial solar plants and so on.
This is an area that can only become more important - and therefore more profitable - as time goes on.
Ethical Investment: Screening For Integrity And Profit                   
As a new ethical investor you should take the trouble to read all the small print in the literature of any fund that you are thinking of investing in. Some of the points you should pay particular attention to are the top ten holdings that the company has. If you are not happy with those first ten, then you should not invest your money in that fund. Equally, check exactly, in percentage terms, how much of the portfolio is directly held in social and environmental stocks.
And while you will, of course, be looking very closely at the ethical structure of the fund - you are in the end looking to make money, so you need to look at that, too!
With the current and foreseeable trend, the ethical investment landscape is the one most likely to prove fertile in the longer term. Most ethical funds perform just as well as - and many out perform - mainstream funds. It is common for a typical ethical fund to give a 125% return over a five year period, whereas the average mainstream figure is somewhere in the 90-100% ballpark.
But you should always scrutinize the fund's history and trends before making any commitment.

Top Ten Tips For Ethical Investors

1.    Know What Your Principles Are
Go to the trouble to think deeply about what your personal ethical principles are and draw up a list of your criteria. Whether they are largely social or environmental or a mixture of both, whether they are positive or negative factors, 'light green' or 'dark green' it will save you a lot of time and energy in the search for a suitable investment partner if you are clear in your own mind what you are happy with and what you are not right from the outset.

Sustainable Development
A simple model of sustainable development.
2. Research Thoroughly
This is very important. If you are not very experienced, the investment market place can seem like a hall of mirrors at first, even more so when you are looking into ethical investment. There are plenty of outwardly ethical investment funds who are really just 'jumping on the band wagon' without the proper credentials and whose holdings can be with companies that would be pushed to pass any reasonable screening. So do your research to ensure that you are joining up with the real players and not those who are simply talking the talk but not walking the walk.
3. Choose A Specialist Independent Financial Advisor
When you are choosing an IFA, make sure that you choose someone who is genuinely knowledgeable about the ethical market - ideally someone who specializes exclusively in these funds.
4. Remember The Risk Factor
Whether mainstream or ethical investment, you should never forget that investing is always a risk and the value of stocks and shares can go down as well as up - quite regardless of whether you are investing in organic farming or depleted uranium cluster bombs.
Aim for a broad portfolio with a lot of diversity in terms of different funds, countries and industry sectors. The old saying 'don't put all your eggs in one basket' certainly applies here!
Invest In A Brighter Future
Ethical Investment gives you a good return on your money and protects the natural environment so you know you are helping to leave a brighter future for your children and theirs.
5. Tax Advantages
You might be able to gain some tax advantages by 'wrapping' your fund in to a Roth IRA if you're in the US or a Cash ISA if you're in the UK. In both cases, you will need to take advice from your IFA before making a decision as there are pros and cons that you will want to consider in more detail.
6. Don't Forget Your Pension
Don't forget that your pension is a form of investment fund and that, too, can be made ethically. If you are sufficiently financially literate, then the best option would always be self-investment scheme, although not everyone has the confidence and experience to manage a fund like that.
7. Choose A Specialist Fund Manager
Not all fund managers are born equal. You should look for an active specialist with a powerful, experienced team, a good track record, a rigorous screening procedure and a proactive attitude to seeking out future trends in the expanding ethical market.
Invest In Earth's Future
There is only one Earth that we will ever know. Invest in its future.
8. Understand Big returns Versus Long-term Returns
On average, as an ethical investor, you will expect to see slightly smaller returns annually. However, that is a pay off against long-term security. For example, you could invest in oil for much larger returns but clearly that is an industry whose days are seriously numbered. Invest in solar power and you'll take less now but you'll see that investment grow steadily into a very bright and secure future. Renewables don't run out.
9. Keep Your Finger On The Pulse
Once you have your portfolio and your fund manager, that is only the start. You then have to be prepared to keep your eye keenly on what is going on within the market as a whole and within your own fund. Maintaining an effective and profitable portfolio is an active affair which may require occasional adjustment. Also, while you will hope for a good relationship with your fund manager, you should always check that its criteria and policies remain in line with your ethical demands.
10. Walk the Walk
If you are going to go to all the trouble of researching and maintaining an ethical investment portfolio, then you should really be rolling the same principles out in your daily life, too.
There's no point avoiding investment in exploitative companies in your fund but then going down to the supermarket and stocking up on chocolate produced by child slaves on the Ivory Coast. Really, an ethical investment portfolio should logically be part of a more ethical lifestyle overall. Then you will also, by default, end up positively discriminating in favor of those companies in whom you have a financial interest, too, as you choose organic, fair-traded, pollution-free products in your daily life.

A US Postage stamp from the 1970s. No longer a fringe concern, ethical and environmental responsibility is a keystone of modern investment.

Find out more with these useful and interesting books about ethical investing:

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