What makes an investment ethical?
Ethical investment has evolved over the years and started out with the concept of negative screening which fundamentally tries to rule out most things an ethical investor would consider to have negative effects. In a traditional stockbroking firm, 20 years ago, clients would specify what they didn’t want to invest in such as ‘no tobacco’, ‘no alcohol’ or even ‘no arms’ (weapons). Negative screening is still used but these days is supplemented with ‘positive screening’ to pick the companies that are actively trying to do good. A company developing a cure for cancer or building more efficient solar panels could fall in this category.
At Financial Planning by TaxAssist, we utilise both negative and positive screening and ask clients to complete a questionnaire to check their views on what they’d like to invest in and what they’d specifically like to avoid.
Does ethical investing make a difference?
It is difficult to quantify the positive difference ethical investing makes to the world but it does skew resources towards businesses that do good and thus makes it a harder for other businesses who are not operating with similar values to raise capital. It’s a growing area of interest for investors and this influences businesses behaviour as for example ethical fund managers get the right to vote and can have a direct influence on corporate decisions and direction.
What is the difference between ethical and sustainable investment?
There are numerous ways in which you can drive positive change through your investments and there are numerous definitions of ethical and sustainable investment.
Some people define ethical investing as avoiding industries that that go against your values or negative screening and sustainable investing as focusing on industries that support your values.
Others present the difference between ethical and sustaining investing as ethical investing as a having a focus on human issues whereas sustainable investing focuses on the environment.
Some describe sustainable investment as including the dimension of time to ensure that the future is considered as well as the present.
Are ethical investments profitable?
Ethical investment certainly can be profitable. Some investment experts argue that ethical investing is actually more profitable because you are tapping into long term trends that are here to stay and avoiding declining industries. Imagine investing in Tesla shares a few years ago. The success of electric cars and Tesla was perhaps inevitable given the domestic and international focus on climate change and carbon emission reduction targets which led to the UK Government to roll out tax subsidies on electric cars. With all investments risk has to be considered but a good portfolio of investments can diversify risks to help remove worry and enhance risk adjusted returns.
Ethical investing is a personal choice and often aligns with people’s values. Some clients value the peace of mind they get by making ethical investment choices. Whatever your investment preference, Financial Planning by TaxAssist are here to help.
Ethical investing for beginners
Arguably ethical investing is more complicated than normal investing because you have an additional set of criteria to consider as well as the task of building a portfolio that is diversified across asset types, regions and industries to mitigate the risk of swings in stock values but that is also suitable for your own personal risk tolerance.
Rather than trying to invest in stocks yourself without experience, we’d strongly advise taking professional advice so all aspects can be considered including your own specific goals and tax position.