A short guide to ethical investing
You have the power to drive change in the world. To ensure that your values are taken into account when you invest. To support those companies that are making good things happen through the products and services they provide, the way they do business or how they give back to society. Anyone who wants to make a positive impact as well as making a return on their investment should consider ethical investing. And it should be easy!
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Why do people get confused about ethical investing?
One of the difficulties with ethical investing is that it means different things to different people. There is no single definition. For example, a pharmaceutical company developing life prolonging treatments for cancer patients would be seen by many as making a positive impact, however, what if they were in favour of animal testing? Would that diminish their ethical credentials? What about an oil company using its resources and technology to clean up the world’s oceans? Would they be deemed ethical for their efforts even though oil is considered polluting?
Sustainable Investing vs Impact Investing
To further confuse matters, there are two distinct ways of investing ethically. Impact investing and Sustainable or ESG (Environmental, Social and Governance investing. Sustainable investing (also known as ESG investing) and impact investing are often confused. However, they are different from an investment perspective.
Sustainable investments look mainly at the company operations and determine whether they have “positive” Environmental, Social, and Governance (i.e. ESG) metrics or, at the least, no “negative” metrics.
Impact investing on the other hand, pays more attention to the actual products and services a company is offering that have a more direct impact in the areas of sustainability and social welfare. An impact investing company must still have sound environmental, social and governance practices in its operations. However, its focus is mainly on selling solutions, products, and services that help the world achieve its sustainability goals.
Grasp this subtle difference between the two and you’ve got it!
Keeping it simple
Once you’ve decided whether sustainable or impact investing meets your values, your independent financial adviser should be able to find the right solution for you. There is a lot of choice nowadays within the ethical investing universe so you do not have to face the struggle of choosing between the two solutions. Your investment portfolio could include sustainable and impact investing solutions if you so wished.
Is ethical investing risky?
Not necessarily. You should of course bear in mind that investing disproportionately in certain industries and excluding others, such as tobacco, alcohol and oil could mean avoiding stocks that could do well in market downturns. This could unbalance your portfolio and make it more volatile.
Related reading: Can you profit from investing ethically?
Don’t overthink it
Some investors believe they’ll have to give up financial returns to make a positive impact. Not true. A benchmark study published by Cambridge Associates found that ethical investing can capitalise on long-term social or environmental trends to compete with, and at times outperform, traditional asset class strategies.
Indeed, ethical investing favours companies that are trying to do good and run their businesses in a sustainable manner. Such companies avoid fines and other penalties; they have stronger relationships with their customers, suppliers and employees. Furthermore, they tend to operate in emerging sectors with high-growth potential. These are all good things for profitability for the private investor.
Whatever your preferences are, don’t get paralysed by overthinking it. Our approach at Sterling & Law is to engage with you to determine your values and preferences. We take your long-term goals into account. We consider your attitude to risk and how much you would like to invest for how long. We then use that information to link you to fund managers who run portfolios of ethical funds, including impact and ESG.
Interested in ethical investments?
If you would like your money to make a positive contribution towards society and the environment, find out more about our ESG investing services.
