Ethical and ESG fund investing: Complete guide

When you invest money, it is temporarily utilised by someone else – such as a firm or a government – to fund their activities. But what if any of these actions go against your personal principles or those of your company? For example, if you are anti-smoking, you probably don’t want your money supporting the tobacco industry. Some organisations may face considerable embarrassment as a result of their ethical investment decisions, such as a homeless charity discovering that it has money invested in gambling companies.

Unfortunately, it is not always possible to predict how your money will be spent. Whether you’re investing for yourself or your company, or simply creating a pension fund, choosing ethical investments can give you peace of mind that your ideals will be upheld.

What constitutes a moral investment?

The term “ethical investing” is a bit of a catch-all. In general, it means you want your money to do good in addition to making a profit (or at least, to do as little harm as possible).

For example, one ethical investor may simply want to avoid investing in companies that are known to cause harm, such as tobacco, weaponry, or gambling.

Also Read – Ethical investing goes beyond traditional funds.

A more stringent ethical investor may seek to invest in companies that have very high standards in terms of the environment, society, and management. These requirements are known as Environmental, Social, and Governance (ESG) criteria, and they are frequently used to filter investments by socially concerned investors.

The fact that some investment funds are labelled “ethical” does not imply that all others are immoral or detrimental. Rather, with a ‘ordinary’ investment fund, your money may be used to support activities that you oppose.

What exactly is ESG investing, and how does it operate?

ESG investing is the practice of taking a company’s environmental and social effect into account before determining whether or not to invest in its stock. As such, it is a more rigorous definition of ‘ethical’ or sustainable’ investing because it considers all of a company’s primary activities and how they affect the world on a large and small scale.

The attractiveness of ESG investment extends beyond moral considerations. Investors are also drawn to it since companies with a good ESG profile may offer superior value.

For example, more sustainable businesses have a better chance of long-term stability, socially responsible businesses may attract the best personnel, and well-governed businesses are less likely to be corrupted or embroiled in disastrous scandals.

ESG fund managers interested in investing in a specific firm will first evaluate its ESG credentials, frequently interviewing both management and staff as well as people related with the company such as suppliers, customers, and local communities. The inquiry looks for both problems and positives in order to provide a complete picture of the company’s overall impact. If the company meets the fund’s ESG standards, the fund may invest in its stock.

What elements are considered in ESG investing?

ESG is an acronym that stands for ‘environmental, social, and corporate governance.’ These are commonly regarded as the three most important variables in determining a company’s or organisation’s long-term viability and effect. These are basically classified as follows:


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Environmental variables consider the company’s carbon footprint, contribution to other forms of pollution, sustainability (how renewable are the resources it uses?) and other environmental implications. Set against these will be any activities that the company performs on a regular basis to lessen or counteract these impacts.

Also Read – Ethical Investment Guide

The diversity of the company personnel, its inclusivity, its duties to consumers, and the corporate regulations governing these are all social factors.

Corporate management

Governance is concerned with how an organisation is built and administered, as well as how employees are treated in relation to management and top executives.

Is it possible to make a profit from ESG investing?

There is substantial evidence that ESG investing is effective in accomplishing its objectives. Of course, its goals are dual: to provide a return to investors while simultaneously promoting ethical and responsible activities.

These two goals can sometimes create friction and tug against each other. A corporation committed to sustainable operation and opposed to exploitation, for example, may not always be able to pursue maximum profits. As a result, its stock may lag behind more ‘ruthless’ corporations in the short run. Serious ESG investors may need to weigh their growth aspirations against their ethical aims and decide which is more essential to them.

However, ESG investment does not always imply sacrificing returns – in fact, the opposite may be true in the long run.

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The 2008 financial crisis was a clear example of what can happen when profits are emphasised over sustainability, with Islamic banks being the least affected because they avoided the industry’s reckless tactics.

Because of the global focus on climate change, green technologies are garnering increasing investment and government subsidies, potentially giving them a financial as well as an ethical advantage. In theory, sustainability and responsibility lessen the risk of an investment “hitting the wall” when its influence becomes too detrimental.

Rather than investing in anything with strong corporate responsibility, a successful ESG fund will often choose companies that are lucrative first and then examine their ESG credentials.

This is why selecting the right fund is critical – a financial consultant can assist you with this.

What is the significance of ESG investing?

If environmental and social responsibility are important to you, ESG investing can be a smart method to support them while also benefiting from them. The ESG investing idea is simple: because all investing is about the future, it should consider the future of the planet as a whole rather than just the fund’s monetary value. To put it another way, it is pointless to have a large investment pot at the conclusion of the process if the world is no longer a nice place to live by then.

As a result, ESG investment has a holistic component, trying to ensure that you have both money and a healthy environment in which to spend it.

What ESG funds have historically outperformed?

Choosing an ESG fund is a more difficult procedure than choosing a traditional fund since you must examine both the ESG considerations and the returns. Different funds, like all investments, contain varying levels of risk, so you must determine that they are appropriate for your risk tolerance. As a result, before making any definitive decisions, you should counsel an IFA about your possibilities.

Here are some of the best-performing UK ESG funds over the last year for your convenience. Keep in note that this period coincided with the Covid epidemic, thus performance may not be representative of long-term trends.

J P Morgan Global Macro Sustainable Fund 2020 performance: 3.09 percent

This fund invests in a global portfolio of sustainable securities, currencies, and, when suitable, derivatives. The selection of securities is based on excellent governance and better management of environmental and social challenges.

Know More – Green & Ethical Investments

Performance of the Sustainable Equity Fund Global – LGT Group from 2017 to 2020: 6.54 percent

This Liechtenstein-based fund has a defensive strategy, which may have helped it exceed its benchmark during the pandemic, which saw many funds decrease.

Nintendo and ITV are among its assets, with the majority of its investments concentrated in utilities and consumer staples, which are less volatile.

Trium Capital’s Trium ESG Emissions Impact Fund

Performance in 2020: 9.34%

The fund is built around a core of roughly 20 long-term investments and targets companies that stand to benefit the most from cost-effectively lowering carbon emissions. The fund is managed with very minimal net market exposure, typically -10% to +10%, which serves to protect it from the stock market’s overall volatility.

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These are only a few instances of recent high-performing funds. However, past performance is never a guarantee of future performance, so seeking counsel in this area is strongly advised.

What can an IFA do to assist me with ESG investing?

The most crucial advantage of hiring an IFA is that they are objective. There are numerous investment funds in the UK and internationally that all want your money, so deciding which one to use is a tough task. Any information you discover on the internet may be prejudiced, erroneous, or out of date, and you never know what vested interests the journalists themselves may have. An IFA, on the other hand, is compensated to work for you and to operate purely in your best interests.

Second, an IFA will have experience picking funds and objectively comparing them.

Simply put, they know what to look for and what characteristics and/or risks to be wary of. They won’t always get it right – but the odds of them picking solid funds are far better than the odds of somebody doing it by luck or after a few hours of online study.

ethical investment

Third, using an IFA is considerably simpler and easier. Simply tell them about your investment goals and ethical preferences, and the IFA will go out and identify appropriate funds for you to choose from. The difference in returns between good and bad funds can be considerable, more than justifying the IFA’s cost in many circumstances.

What are the many types of ethical investments?

If you wish to invest ethically, you must first decide how rigid you want to be. If you are OK with simply avoiding particular industries or corporate practises, Socially Responsible Investing (SRI) may be sufficient for you. When establishing a portfolio, SRI funds use broad criteria to weed out less ethical companies. SRI funds, on the other hand, tend to focus on ‘best in class’ companies rather than shunning entire industries, so they may include (for example) oil corporations that demonstrate greater accountability than their competitors. These funds are commonly referred to as ‘light green.’

If you prefer a more stringent approach, you should check into totally ethical funds. These will hand-pick companies to invest in based on their stringent ESG criteria, and will reject those that do not match their requirements. Such funds are categorised as ‘dark green’ or medium green’ (for those with significantly fewer restrictions).

A ‘passive’ ethical investing fund is another type of fund. A passive fund invests in a variety of ordinary firms, regardless of their ethics, and then utilises its position as a big shareholder to try to remedy any ethical difficulties through resolution voting. Of course, there is no assurance that the fund will be successful in changing the behaviour of the firms.

How can I pick the best ethical investment?

Even while investing ethically, keep your own interests in mind first. This isn’t a charitable donation, but rather a mutually beneficial financial transaction. So, at first, approach it as you would any other type of investment. Discuss your investing goals with a specialised financial adviser, assess your risk profile together, determine how much money you have to invest, and only then begin looking at individual funds. Regardless of their ethical credentials, evaluate them as thoroughly as you would any other type of investment.

You should also confirm if the fund is truly ethical rather than just claiming to be.

ethical investment

Read up on it and find out what its top ten holdings are, how much of its portfolio is made up of social or environmental assets, and look into anything that doesn’t fit your definition of ‘ethical.’ It is ultimately up to you to determine what is ethical for you.

Are there any additional benefits to ethical investing?

Beyond social duty, ethical investing may have further advantages. Many ethical investment industries (such as low-carbon energy) get government subsidies, which may offer them a competitive edge in terms of growth. One crucial ethical criterion is sustainability,’ and sustainability is also beneficial to investors over the long run. Similarly, ethical funds seek out companies with strong governance, as these are more likely to be stable and less volatile.

Furthermore, ethical investments are becoming more popular, and the younger generation prefers more ethical enterprises — both of which point to a promising future for this type of investing.

Are there any disadvantages to ethical investing?

There is minimal evidence that ethical funds outperform conventional funds. Having stated that, there are certain considerations to make. Ethical investment limits your options for companies to invest in, which may result in less diversification in your portfolio (and less diversity can mean higher risk). Your financial options may be similarly constrained. Because ethical investments are less volatile, you may observe slower growth with fewer peaks, even if total gain is more consistent.

ethical investment

Finally, because fund managers must spend more time investigating the companies in which they invest, ethical investment funds may charge higher management fees. You may also make better use of your own time.

What else should I think about when it comes to ethical investing?

Always keep in mind that the goal is to make money for yourself rather than to help a specific cause. Don’t mix up the cause and the investment. If you believe a company is particularly admirable from a moral standpoint, you may be predisposed in its favour and pay less attention to the quality of the investment itself.

This is yet another reason to seek the advice of a financial advisor first, as they will provide critical objectivity and ensure that you make decisions with your mind rather than your heart.

by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

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