Are you interested in the idea of making lots of money and, at the same time, making the world a better place? You are not alone.
A recent survey of Irish savers found that more than half are keen to put their cash into ethical investments. Indeed, ethical and socially responsible investment funds are one of the fastest growing areas of personal finance. Such funds pool investors' money and then use it to buy shares in companies that meet pre-defined criteria.
For example, one fund might only invest in companies that behave in an environmentally responsible way, whilst another might focus on companies that aren’t involved in the exploitation of people or animals. John Lowe of MoneyDoctors.ie has the background…
What is an ethical investment?
The history of ethical investment can be traced back to the 19th century. It began when religious movements, most noticeably the Quakers and Methodists, recommended that their adherents withhold investment from companies that didn’t embrace temperance and fair employment conditions.
Over the course of the 20th century the use of ethical criteria when choosing between investment options spread – especially amongst churches, charities and non-profit organisations.
In 1971 the first ethical investment fund, the World Pax Fund, was founded with the declared objective of not supporting companies that were profiting from the Vietnam War. During the 1980s opposition to the apartheid movement in South Africa and environmental concerns gave ethical investment a boost and many more funds were established.
By the new millennium close to one sixth of all US funds were invested in 'companies with a high degree of social responsibility’.
The definition of ethical investment is giving an individual power to allocate capital toward companies whose practices and values align with that individual’s personal beliefs. Some beliefs are rooted in environmental, religious or political precepts.
What areas do they cover?
What Ethical fund, unfortunately, have in some quarters is the image of a fund that is guaranteed to deliver below-par returns to eco-conscious types. The UK’s first ethical fund was nicknamed Brazil as "you’d have to be nuts to invest in it."
Under the umbrella of ethical investing are:
- Socially responsible investing (SRI)
- Environmental, social and governance factors (ESG)
- Impact investing
- Sustainable investing
Basically you are choosing investments that have and will have a positive impact on the world. If you plan to adopt an ethical investment strategy the first step is to consider what issues matter to you.
Some of the corporate activities you may not wish to profit by include animal testing, genetic engineering, environmental destruction, inattention to human rights, intensive farming, nuclear power, arms, pesticides, pornography, deforestation, alcohol, tobacco and low pay or poor conditions for workers.
By the same token there may be specific activities or industries you wish to support through your investment. These could include companies with a good track record of community involvement, environmental care, corporate governance and generous treatment of employees and suppliers.
You may also decide to put your money into companies that provide ‘positive’ goods and services such as organic food or healthcare.
How can you know to trust them?
Discovering whether a particular company – including a bank – meets your ethical criteria can be difficult and time-consuming. One of the many advantages offered by ethical and socially responsible investment funds is that they have the resources to research and assess individual companies.
Many funds supplement their knowledge with data from other sources such as the UK-based charity, Ethical Investment Research Service (EIRIS). EIRIS, which offers a great deal of invaluable information through their website, carries out independent research covering over 40 different areas and holds detailed, up to date information on over 2,600 companies.
Another British based non-profit making body offering a range of invaluable information is the UK Social Investment Forum, which runs an excellent seminar programme.
Are the returns worth it?
One of the most prevalent myths concerning ethical investment is that the profit element will be less than if you invested without taking ethical considerations into account. If you look at the overall statistics ethical funds have produced above average returns even allowing for the costs of extra screening. Many funds perform even better.
There are various reasons for this. Ethical fund managers study the companies they are considering investing in much more vigorously than their non-ethical colleagues. Also, companies with strong ethical principles tend to be better run and less hampered by regulatory, legal and publicity problems.
In fact, five ethical indices created by EIRIS to evaluate returns within the ethical investment sector produced financial returns almost exactly equivalent to the FTSE All-Share Index; the Investment Management Association found that ethical funds have matched or bettered the performance of similar non-ethical funds; and a Europe-wide study by the University of Maastricht made identical findings.
In the UK, Europe and the USA there are hundreds of ethical and socially responsible investment funds to choose from. So many that you can select funds that meet your precise investment needs in relation to risk and return. Furthermore, many of the ethical funds have now been established for over three decades allowing investors to analyse the long-term performance figures.
What are my options in Ireland?
Here in Ireland the options are still relatively limited but many of our larger financial institutions – including Friends First, Irish Life, Zurich, Standard Life, AVIVA and Cantor Fitzgerald to name but 6 all now offer ethical funds.
Cantor Fitzgerald’s Green Effects Fund was set up in 2000 targeting the Irish and German ethical investment communities and currently valued at €339.83 per share – it is the largest ethical fund in the Irish market with a fund size of €174.91million:
- Stocks selected from the constituent members of the NAI (Der Natur-Aktien) index
- Pure ethical index based on the selection of the NAI committee (Germany based ethical selection Committee)
The choice is growing all the time. It is also possible, of course, to build up a portfolio of individual company shares.
As with any investment decision, you should take professional advice before taking action so as any planned investment will meet your ethical as well as your profit objectives.
The views expressed here are those of the author and do not represent or reflect the views.