Discover how to invest in line with your ethical beliefs without compromising returns
If you’re looking to align your financial goals with your values, ethical investing is the way to go.
And good news – ethical investing isn’t a niche thing anymore. There’s a wider “paradigm shift” towards more ethical ways of doing business and investing.
Global ESG (Environmental, Social, and Governance) assets are projected to surpass $40 trillion by 2030, accounting for over 25% of the anticipated $140 trillion in total assets under management.
The numbers tell an exciting story, with ethical funds often outperforming more traditional funds. For instance, during the Covid-19 pandemic the average ethical fund grew by 4.3% in the UK, while non-ethical funds fell by 1.5%.
Ethical funds are continuing to show strong performance, with a 12.6% median return for sustainable funds vs. 8.6% for traditional funds in 2023.
The question is – how do you build ethical investments into your financial plan? Let’s explore the options.
WHAT IS ETHICAL INVESTING?
Ethical investing has deep roots. In the 18th century, Quakers refused to profit from the slave trade and withheld money from businesses that did. Around the same time, preacher John Wesley famously warned against gaining money “at the expense of life or by losing our souls.”
Fast forward to 1928, and Philip Carret launched the world’s first socially ethical investment fund, which, by the way, went on to consistently outperform traditional indexes like the S&P 500!
In modern terms, when we talk about ethical investing, we’re not talking about companies that “greenwash” their eco-credentials. We’re talking about investing in companies that “walk the talk” when it comes to things like sustainability, fairness, and being honest with people.
The basic goal of ethical investing is simple – to grow your money in a way that sits well with your principles. It’s not about chasing the biggest returns no matter what, as you’re thinking critically about how those returns are made.
ESG is a good indicator you can use to decide which companies to invest in. ESG stands for:
- Environmental – such as cutting carbon emissions or protecting nature
- Social – treating workers fairly and giving back to communities, for example
- Governance – making sure leadership is transparent and doesn’t get up to shady business behind closed doors
When you’re starting out in ethical investing, taking an SRI (Socially Responsible Investing) approach helps you avoid the “bad guys” like tobacco companies or weapons manufacturers.
Many ethical investors opt for “impact investing” which means putting your money into companies or projects that make a positive impact in the world, like renewable energy startups or affordable housing projects.
Nowadays, you can invest ethically using a variety of investment vehicles, including stocks, bonds, funds, ETFs, and others. Ethical investing isn’t just a tiny corner of the market anymore, and it’s available everywhere if you know where to look.
WHY ETHICAL IVESTING IS GROWING FAST
Baby Boomers are driving a lot of the growth, as they’re keen to pass their down money at the same time as leaving behind a planet that isn’t ruined beyond repair.
The business world has shifted toward more ethical practices — and with good reason. Around 58% of companies with strong ESG standards have seen better financial performance.
The consensus among younger generations (Millenials and Gen Z) is that big companies shouldn’t say one thing and do another. For this reason, there’s growing demand for investment options that actually stand up to scrutiny.
Modern investment platforms are making it easier than ever to invest more ethically. You can simply open an app, pick an ethical fund, and you’re off. It’s more accessible than even five years ago.
HOW ETHICAL INVESTING WORKS
There are several strategies and tools to invest more ethically and you don’t need to pick just one. In fact, it’s often best to mix and match approaches depending on your investment goals.
Negative screening
Negative screening helps you avoid the bad apples, by setting up your personal “no-go” list based on your values and beliefs. You might opt to avoid investing in things like tobacco companies, weapons manufacturers, or gambling businesses, for instance.
Positive screening
Instead of just avoiding unethical businesses, you’re actively picking good eggs, i.e. companies that work hard to maintain sustainability, diversity, and fair labour practices. Think of it like choosing companies you can cheer on rather than those you want to boo.
Impact investing
Impact investing means putting money directly into businesses or projects that make a clear, measurable positive difference, such as eco-friendly manufacturing businesses.
Thematic investing
If you have a particular passion for things like clean water, green energy, or better healthcare, then you can target investments around that specific theme. It gives you peace of mind that you’re helping the causes you care most about.
Community investing
This means funding projects that support local communities or underserved areas. For instance, you can invest in small business loan providers and community banks.
Shareholder advocacy
If you invest in a company that practices shareholder advocacy, you get a voice. Shareholder advocacy means you get a right to vote on important company decisions, such as pushing for better environmental policies or diversity at the top.
HOW TO START INVESTING ETHICALLY
Ethical investing isn’t too complicated. Here’s a set of step-by-step actions to get started.
Step 1 – Define your values
First things first, set out what’s important to you. Is it climate change? Workers’ rights? Animal welfare? All of the above? See which direction your internal compass is pointing before you start the journey into ethical investing.
Step 2 – Check existing investments
If you already have money in investments, there could be unethical companies there, maybe even in your pension fund. Do a little digging and find out where your current savings, pensions, and ISAs are invested. A lot of us have money stuck in funds that don’t match our values, so find out and withdraw it as soon as possible.
Step 3 – Research ethical funds and platforms
There are dozens of online sites and platforms that make it easier to find ethical options, such as platforms like Wealthify or Interactive Investor that have dedicated ethical or sustainable options.
If you want to do a little extra digging yourself, other tools like As You Sow show you a company’s environmental standing. And it’s worth checking out annual sustainability reports. Be on the lookout for cold hard data and deadlines, not just feel-good stories.
Step 4 – Decide how hands-on you want to be
Some people like to pick their own individual stocks. If you want to make life easier, you can invest through funds or ETFs that do the screening for you.
Step 5 – Use tools to double-check what you’re buying
Websites like Fund EcoMarket or checking Morningstar’s sustainability ratings help you see whether a fund is actually living up to their ethical claims, or if it’s all just words.
Step 6 – Set your plan and stick to it
Before diving in, get clear on a few basic goals.
- How much are you willing to invest?
- How long are you planning to leave it?
- How much risk are you happy to stomach? (Because let’s be real, even ethical funds can have ups and downs.)
Once your plan is in place, it’s best to stick to it rather than moving money around frequently. Patience usually pays off in any type of investing and long-term gains often outweigh short-term ones.
COMMON CHALLENGES IN ETHICAL INVESTING
Complexity
ESG, SRI, impact investing, sustainable investing… It can feel like learning a whole new language at times! Finance people love making things sound more complicated than they need to be, so remember: those terms are all slightly different ways of saying ethical and responsible investing.
Greenwashing
Some companies and funds are good at looking green without actually doing much to help the planet. Make sure you see genuine environmental credentials, as a fancy website and a few buzzwords don’t mean a company is ethical.
Limited options
The lack of options means you’ve got to be a bit more patient when hunting down the right investments for you. The good news is in the UK alone, there are now over 370 funds marketing themselves as ethical, and that number keeps growing as demand increases.
Differing definitions of “ethical”
What feels ethical to one fund manager might not sit right with you. For example, some funds still invest in oil companies because they’re “transitioning to renewables.” It’s a personal thing and you’ll have to decide where your own red lines are.
No company is perfect
If you’re waiting for a 100% squeaky-clean company that ticks every box, you’ll probably wait forever. Ethical investing often means choosing the best available option, not the perfect one. Think of it as moving in the right direction rather than finding a perfect destination.
Risk factor
Just because a company is ethical doesn’t make it bulletproof. Ethical funds can (and do) go up and down with the market like any other investment. It still pays to diversify your portfolio and avoid putting all your eggs in one basket.
THE FUTURE OF ETHICAL INVESTING
ESG principles are becoming a normal part of the business world and this is likely to continue. There is growing pressure to prevent “greenwashing” too, with the UK government cracking down on companies that exaggerate their eco-credentials.
Workplace pensions are starting to change as more people ask “Wait… what is my pension actually funding?” Campaigns like “Make My Money Matter” are helping to raise awareness of this problem.
With Millenials making up roughly 75% of the workforce now and older investors becoming more socially-conscious too, the shift towards ethical investing will continue and the number of available funds will grow. Here at Aria, we’re ready to help you invest in a way that actively does good in the world. Talk to one of our advisors today.
