Ethical investments: Is it always a good idea to put your money where your morals are?

We might live in a consumer society, but there is no doubt that the nature of how and where we spend our money is changing fast.

Today, as populations around the world become more aware of the significant environmental and social challenges facing our planet, increasing numbers of enlightened people are factoring ethics into their actions and spending decisions. Their aim is to make a positive impact on the world and tackle the negative influences at play.

Investment strategies have long been used to support ethical positions, with consumers distancing themselves from companies where they judge their actions to be questionable, unjustifiable or simply damaging.

In recent years, however, the momentum behind this movement has gone up several gears, boosted by heightened concern around issues including climate change and social inequality, as well as a growing appetite among populations to enforce change.

The rising popularity of ethical investments

 In the financial services industry, this is manifesting itself in various ways, not least through a surge in the popularity of socially responsible investing and investment funds that are guided by environmental or socially responsible principles.

Data from the EIRIS Foundation, a charity working in the area of responsible investments, estimates that Assets Under Management in UK green and ethical funds jumped dramatically in the year to 2021 to a total of £61.12 billion. This compares with a figure of £33.5 billion in 2020.

For the ethical investor, placing their money into such funds has the potential to deliver benefits on two fronts – firstly in terms of the possible return on their investment and also in terms of the comfort they receive from knowing that this has been achieved on an ethical basis. Sustainability also carries twin benefits, both in the sense of protecting the environment and also avoiding volatility in favour of stability and longevity.

However, ethical investing is inherently more complex than traditional approaches since it is not exclusively focused on returns, as in the case of more single-minded, one-dimensional strategies. Instead, decisions are made with consideration for the nature of the companies and funds concerned and whether their associated actions or principles are deemed to be ethical.

This introduces further complexity since there is no universal rulebook for what is ethical and what is not; it is inherently subjective – every individual will have their own interpretation of where the boundary lies between what fits and what doesn’t.

For example, some people will actively seek to affect change through ‘impact investing’ while others may take a slightly less robust position and simply seek to screen out anything from their portfolio that does not demonstrate strong environmental, social and governance (ESG) credentials. It’s the difference between choosing to invest in renewable energy rather than avoiding investments associated with fossil fuels.

Aligning your ethics and investments

For an individual, it can be challenging to ensure companies and investments that claim to be responsible truly match up to their personal ideals, particularly given the multi-layered supply chains upon which many businesses depend.

In a fast-moving world, it may also be difficult to keep up with market shifts that change our view of what’s ethical. Companies, and sometimes whole industries, have previously been hit by unforeseen scandals or become embroiled in socio-political crises, triggering decisions and actions for the ethical investor.

An alternative is to entrust your ethical investment strategy to an adviser.

Having successfully navigated the tricky issues around ethics, there is then the question of costs and returns. And while there is a narrative that ethical investing is more expensive, the flipside of that argument is offered up in analysis from Morningstar. This looked at average annual returns over a ten-year period, which revealed a figure of 6.9% for a sustainable fund invested in large global companies compared with 6.3% for a traditionally invested fund.

There are lots of caveats to these figures and, of course, there are absolutely no guarantees when it comes to returns for funds of any kind. What is certain is that more investors are seeking to pursue an ESG agenda in regard to their wealth management strategies.

As with anything to do with ethics, it can be complicated and there will be important questions to consider, making it all the more important that you equip yourself with knowledge and seek out expertise in order to make the right choice.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Broad Street Financial Planning or its associated representative shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.