In my last blog I demonstrated two reasons why ethical investing is difficult; firstly, there is no set definition of the term and secondly, finding out just what a fund with ‘green’ or ‘ethical’ in its name invests in is not always straightforward.
Now, I am going to discuss some of the solutions to those problems. In the past decade there has been an upswing in both interest and innovation in the ethical investment sector, all of which means growing choice and control for consumers. It’s not perfect yet, but it is possible for individuals to invest in line with their values without compromising on the financial side.
Keeping it ethical
Several years of Great British Money Surveys have found that most people who want to avoid investing in one way or sector also wish to actively invest in another.
For example, over the course of three years an average of:
- 44% of people would be unhappy if they found out their money was being used to fund fossil fuel developments
- 65% of people want to invest in things that give both a decent return and don’t harm our future
- Renewable energy has consistently been the second most popular investment sector among respondents, beaten only by property
Unfortunately this can often compound their existing search, which brings us to screening.
Negative screening is probably the most common way investors choose funds. This is a strategy whereby a fund that invests in a stock or practice you don’t like is dismissed; e.g. if I don’t want to invest in tobacco stocks, I avoid funds that include tobacco companies in their portfolio.
Positive screening arguably takes this one step further. Rather than focusing on avoiding things, it seeks to include them. This might mean buying a fund or stock that has a ‘positive’ investment strategy and invests in companies or projects that are doing environmentally or socially positive things. That might be using renewable energy, cutting waste, better worker or animal welfare. Much like negative screening, it is an individual decision on what best fits your values.
Another strategy typically used is to go for different shades of ‘green’ funds. The darker the green, the more things the fund will not invest in on ethical grounds. However, with no set criteria for what makes which ‘shade’ of green it can once more be difficult for investors to know just what is included and what is excluded.
All of which leads us to the advice option. An independent financial advisor would be able to find investments that suit an individual’s ethical criteria and there are advisory firms that specialise in this sector, Castlefield being one of the best known among them. On the other hand, not everybody has the means to or wants to pay for advice.
The third way
Growing in popularity is the DIY approach. If funds are simply a collection of stocks and shares bought and sold by a fund manager, what is to stop an individual investor doing the same? In the past the mounds of paperwork involved, and keeping track of investments via a folder on your shelf, was justifiably reason to hand it over to somebody else. Now the internet makes it quick and easy to make ethical investments and keep track of them, often all in one place. The growth in community bonds, peer-to-peer lending, and individual share dealing is testament to the fact that there is a market for investments that are transparent and positive and easy to manage.
Peer-to-peer lenders such as Zopa, Ratesetter and Funding Circle are among these, as is Abundance. Each offers something different: Abundance specialises in positive infrastructure such as renewable energy projects. Zopa and Ratesetter let you lend your money to ordinary people, who pay it back with interest – more of which goes to you than if the transaction happened through a high street bank. Funding Circle enables you to lend directly to UK small businesses, helping them and the economy grow.
Community bonds are typically in the renewable energy realm too, although often with higher minimum investment amounts than larger online platforms can offer. Unlike Abundance Debentures, they are not regulated and are non-transferable, so if you need access to your money it is not always possible to get unless the bond is maturing anyway. And unlike with regulated investments, if something goes wrong, you cannot complain or get help from the Financial Ombudsman. As well as this, they are falling in number with cuts to solar subsidy in particular.
Individual stocks and shares are also an option. It may require some time to look into the companies you might like to invest in and finding out about their business practices, supply chains, and the like, depending on how strict you want to be.
Any mixture of the above is for many people the solution to the ethical investing dilemma. You could partly invest positively in peer-to-peer and then choose a discriminatory strategy for stocks and shares (i.e. avoiding sectors you do not wish to support). With the launch of the Innovative Finance ISA earlier this year, I would not be surprised to see more people branching out and investing their money in different sectors and through different platforms as the number of companies offering the ISA grows. Not only does it make sense from a financial perspective in a low-interest rate world but it also increasingly fits with the words we speak and actions we take in other areas of our lives.
Part or all of your original capital may be at risk and any return on your loan or investment depends on the success of the project. Investments tend to be long term and may not be readily realisable. Estimated rates of return are variable and estimates are no guarantee of actual return. Consider all risks before investing.