Ethical investment: A beginner's guide

Rachael Revesz

Here's how to begin an investment portfolio that does as much good for the world as it does for your wallet. 

Concerns about the planet are at a record high. A recent YouGov poll found that 27% of people in Britain consider the environment as one of the three issues they care about most. As a result, we are more likely to recycle, ditch fast fashion and drink coffee from a reusable cup.

But what is ethical about the way we invest our money? While we can choose a bank, current account or insurance provider by its ethical credentials, we can also do the same with stocks and shares.

And there’s no need to worry about lower returns. Recent research from Morningstar found that sustainable funds have been outperforming non-sustainable ones by 0.6% a year.

 

What exactly does ethical mean?

ethical investment

In the 1960s, "responsible investment" usually meant avoiding alcohol and tobacco companies. In 2020, it’s much more nuanced.

In fact, the responsible and sustainable market is booming, with more than $30 trillion invested around the world, and offering everything from funds that focus on gender equality to veganism.

But the definition of so-called ESG (environmental, social and governance) investment has been debated for years. While the "E" includes a company’s carbon footprint, the "S" could focus on gender and racial equality and the "G" covers everything from employers providing a living wage to being transparent about their hiring process.

In short, there is no one definition of ESG, and no single fund that will tick every box. Investors will have to do their research to match what they care about with what is on offer in the market. And while there is more choice today, there are still limitations. In 2020 research found that more than half the ESG funds focus on climate change, while far fewer products tackle labour and human rights and biodiversity, although that is slowly changing.

 

How can I research in-depth which fund I want?

how to research

Websites like Climetrics allow you to search for funds for free. This report from ShareAction ranks the largest asset managers in the world by their ESG credentials. Moneyfacts also has a list of top ethical fund picks.

Above and beyond the ethical nature of your investment, you might also care about the ESG credentials of the fund provider itself. It’s an extra layer of due diligence, but as Share Action found, the vast majority of fund houses offer so-called ESG funds without exactly leading the pack on diversity and equality within their own organisations.

Thankfully, an increasing number of fund providers are producing transparent information on their own values and practices. This 2020 responsibility report from Federated Hermes is a stand-out example, covering everything from its gender pay gap to its waste and paper usage.

 

How can I access an ethical investment?

access investment

There are two main ways to access ethical investments that don’t cost the earth.

The first is to create an account on an investment platform such as Interactive Investor or Charles Stanley Direct and start selecting funds. You will likely pay an annual fee for the investment platform plus an annual fee for each fund you invest in. You will also pay trading fees when you buy and sell funds, so it’s key to make a good decision and stick with it.

Each platform will differ in how much it charges, what (sustainable) funds you can pick, whether you can access schemes like crowdfunding, and the T&Cs on ISAs and pensions. So, how to choose? Check out Boring Money (choose "sustainable investors" as a search filter) and this recent list from Good With Money.

The second option is to invest in a ready-made portfolio, where you don’t pick the funds yourself. There are more and more investment companies, including Moola, Wealthify and Nutmeg, some of whom charge as little as £1 to invest in a diverse portfolio. (Some of the ethical options are slightly more expensive because they include actively managed funds, which means the fund is run by a manager who decides what to buy and sell, rather than a fund that simply tracks a certain stock market like the FTSE 100.) Again, Boring Money does a good round-up of ready-made portfolios.

 

What if my pension is already invested?

If you have a workplace pension, you can contact the pension provider either directly or through your HR department to discuss what funds your pension is invested in and what options are open to you.

If you have several pension pots lying around from past employers, you can combine them easily into one place via an online service such as PensionBee, and choose their ethical range of funds.

 

The basics still apply

make a change

There are certain rules that are the same for all investing. Only spend the cash you can afford to part witfor at least five to 10 years.

Don’t worry about the market going up and down—the longer you keep your money invested, the likelier you are to make a return. So log out of that app and enjoy the thought that your money is making a positive difference.

 

Read more: 8 Alternative ways to invest money

Read more: Is it worth investing in gold?

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