Ethical investment goes under many guises, some call it socially responsible investment, and others call it sustainable investment, green investment or responsible investment as well as ethical investment. It refers to ethical principles influencing investment decisions, such as environmental or social issues.
How Does It Work?
There are three main ways to choosing your ethical investments, including screening, preference and shareholder activism. We’ll take a look at all three.
There is no agreed to definition of what is an ethical investment and what isn’t, it is usually down to the investors thoughts and feelings on certain issues. Screening is a common way that fund managers decide on which companies to invest in.
Negative screening is when an investor decides that they want to avoid companies that invest in arms manufacture or porn, for example, and is therefore removed from potential investments.
Positive screening, on the other hand, supports companies because of their involvement with projects that have a positive impact. For instance, an investor may want to invest in companies that support renewable energy or social responsibility.
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A preference investment method involves using ethical, environmental or social factors to produce an obvious choice. For example, an investor might want to invest in the construction industry, but will only invest in those using environmentally friendly materials, which narrows down the preferred choices.
This third approach is where investors attempt to influence the company’s behavior. This is a way of encouraging companies to adopt more socially responsible behaviors and investments. This could be through voting at annual meetings or even meetings with senior management.
What Are Green Investments?
Green investment is yet another way of considering ethical investments. The ‘green scale’ tells you how far a fund is committed to ethical, environmental or social responsibility. Similar to a screening approach, it assigns them a color and makes it easy to see how ‘green’ or ethically responsible a certain company might be.
Dark green investments avoid companies in certain sectors, like tobacco, fossil fuels or arms, and actively invest in companies that have an ethical agenda.
Light green investments might be invested in any company, but one that is working on improving its performance when it comes to ethical responsibility. The lightest green will likely only avoid what you might consider to be unethical companies, but will mostly look like any other investment fund.
Is Your Ethical Fund Really Ethical?
There is no universally recognized definition when it comes to ethical investment funds, as people have different ideas of what it means in this context. It is safe to assume that an ethical fund may not necessarily meet the same principles that you believe in, as this is not always transparent. It is therefore crucial to talk to your fund manager to ascertain their approach to ethical funding. An independent financial adviser is probably the key to an honest answer, or investing in companies that are known for their ethical policies, like the Co-op group.