What is Ethical Investing?
Ethical investing simply means applying your ethical principles when selecting what to invest in. Ethical investing will of course vary depending on each investor's views.
Ethical investing gives the individual the power to allocate capital toward companies whose practices align with their personal beliefs – this could be environmental, religious, or political. Some investors may choose to eliminate specific industries entirely. Industries such as gambling, alcohol, or firearms are also known as “sin stocks” and are often excluded by ethical investors.
The earliest recorded instance of ethical investing in America was by the 18th century Quakers, who restricted members from spending their money in the slave trade. John Wesley, a founder of Methodism, preached the importance of refraining from investing in industries that harm one's neighbour, such as chemical plants. Another example of a religious-based ethical investing regime is seen in Islamic banking, which shuns investments in alcohol, gambling, pork and other forbidden items.
In the 1990s, ethical investments began to focus heavily on environmental issues. Ethical investors moved away from coal and fossil fuel companies and toward those that supported clean and sustainable energy. Today, ethical investing continues to primarily focus on impacts to the environment and society.
How to Invest Ethically
Choosing an investment based on ethical preferences is not indicative of the investment's performance so you would be putting your money where your mouth is.
If you are committed to invest according to your own ethical standards you will have to research to determine whether an investment or group of investments coincide with your views, especially when investing in an index or mutual fund.
In addition to analysing investments using ethical standards, the historical, current, and projected performance of the investment should be scrutinised. To examine whether the investment is sound and has the potential to reap significant returns, the review of a company's history and finances is warranted. It is also important to confirm the company's commitment to ethical practices.
Ethical funds are increasingly popular with 56 per cent of UK investors having upped their allocations to them over the past five years (according Schroders).
Such funds are increasingly popular, with younger generations placing greater emphasis on a socially responsible approach to investing, but also big investors such as pension funds are seeking to back an ethical stance on environmental, social and governance (ESG) factors.
Do Ethical Investments match up to more diverse portfolios?
In the US, the FTSE4Good US Index returned 155% compared to 129% for the S&P 500 over five years to October 2018 - over 10 years the margin was wider - 349% vs 297%.
However, what might appear to be good news for ethical investors, a closer inspection can pinpoint the major factor behind this difference is that the “sin stocks” in the oil and mining sectors have performed poorly compared to the market as a whole over the past 10 years.
A report from FundExpert states that if you had invested £100,000 a decade ago in the best ethical fund in the UK All Companies and Global investment sectors you would be £230,040 and £302,650 worse off respectively than if you'd put that money into the best unconstrained fund.
Only one fund, Standard Life Investments UK Ethical, makes it into the top 20 per cent best performing funds in this sector over 10 years, achieving a return of 162% which is 230% less than the return made by Slater Growth, the best performing fund.
Dimensional Fund Advisors
EFPG makes no secret about our fondness for Dimensional Fund Advisors. For 6 years we have been in partnership with Dimensional and the vast majority of business that we conduct we recommend Dimensional funds. They are extremely efficient, diverse and tend to do exactly what we would expect of them.
Dimensional’s Sustainability Fund has comfortably outperformed the Standard Life Investments UK Ethical AND Slater Growth since the fund began in June 2013.
So if you are interested in investing ethically and want a good return, please contact EFPG for more information.