How to pick shares, funds and trusts that reflect your values and avoid 'greenwashing'
MT
Megan ThomasResearcher & writer
What is ethical investing?
Ethical investing is an umbrella term for all approaches to investing that consider values as well as financial returns.
The term also covers issues including, but not limited to, climate change, workers rights, gender equality, arms, tobacco and gambling when selecting companies and other assets.
Traditionally, ethical investing meant not investing in certain companies that contravened your beliefs.
More recently, however, it's expanded to include focusing companies that make a positive real world impact, or investing in other companies in order to help them improve.
Here we explain the various approaches and how to avoid 'greenwashing'.
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What makes an investment ethical?
From 31 May 2024, when the Financial Conduct Authority (FCA) ‘anti-greenwashing’ rule comes in, which will ban funds from using language like ‘sustainable’, ‘green’, or ‘responsible’ without the means to justify it.
Here we've detailed the main approaches, which can be mixed and matched:
Exclusionary
Where you don't invest in companies or assets that contravene your goals. For example, your fund may decide not to invest in companies that extract fossil fuels.
Similar to the FCA's Sustainability Focus fund label (see below)
- Pros:you know that your money won't be going into certain industries
- Cons:you've got fewer companies to choose from, and those remaining may have a neutral rather than positive impact
Impact
Where you invest in companies to produce a measurable real-world impact. For example, your fund may invest in companies that make wind turbines to increase the percentage of power generated by them.
Similar to the FCA'sSustainability Impact fund label.
- Pros: your money should have a real-world impact
- Cons:you've got fewer companies to choose from and the real-world impact might not be achieved
Stewardship
Where you invest in companies to make them more positive, via votes at annual general meetings. For example, your fund may invest in fossil fuel producers to encourage them to spend more on renewable solutions and reduce their fossil fuel operations.
Similar to the FCA's Sustainability Improvers fund label.
- Pros: you can invest in a wider variety of companies
- Cons: your money could be going into activities you're not comfortable with, and if in a fund, you're dependent on the fund manager to vote and put pressure on companies
ESG
What does ESG mean?
ESG (environmental, social and governance) was once a catch-all term for ethical investing.
But investors should view it with suspicion.
At its minimum, an ESG investment fund could simply consider the effects of, say, climate change on the companies it holds, without doing anything to stop climate change.
Or it could mean assessing companies on ESG factors while ignoring their overall negative impact.
For example, we found an ESG-branded fund that invests in the top 25 precious metal mining companies when ranked on ESG criteria. Yet these companies are still causing substantial damage, just doing better than other mining companies.
How can you invest ethically?
If you've got limited time, or investment experience, you could ask a independent financial adviser (IFA) to choose investments for you, at a cost. Use an IFA that's part of the UK Sustainable investment and Finance Association.
A cheaper alternative is to use a robo-adviser platform, which offers a portfolio of funds based on your attitude to risk.
If you're happy to make your own investment decisions, you've got several options:
Picking shares
You could buy shares in individual companies with which you agree, but building a balanced portfolio this way is very labour intensive.
Bear in mind that investment platforms tend to charge transaction costs each time you buy or sell a share, so constant tinkering can damage returns.
Investment funds and trusts
Investment funds or investment trusts enable you to invest in hundreds or potentially thousands of companies at once.
Soon UK funds will be able to use regulator-backed labels (see below) stating what sort of ethical approach they take.
Actively managed funds, where a fund manager or team picks the investments, charge higher fees.
Passively managed funds tend to charge lower fees, but rely on indices and/or data to decide what to invest in.
Bonds, gilts and cash
There are a number of fixed income investments available for more risk-averse investors, such as green and ethical bonds.
The UK Government will also begin issuing green gilts, where proceeds are directed towards a range of environmental projects.
If part of your portfolio is in cash, choose a savings account with a more sustainable provider, using our rankings.
New FCA sustainable fund labels
Fund managers will be able to use fund labels from 31 July 2024 that identify their fund as one of the following:
- Sustainability impact - funds that invest in assets directly making a positive impact
- Sustainability focus - funds that invest in assets meeting a robust, evidence-based standard of sustainability
- Sustainability improvers - funds that invest in assets that have the potential to meet a robust, evidence-based standard of sustainability
- Sustainability mixed goals - funds with this label invest in a mix of the above styles.
At least 70% of the assets held in a fund must be invested according to the sustainability objective set out by the fund’s manager, which must fall into one of the above four categories.
The remaining 30% of assets can't be in conflict with the objective, although they don't have to meet it exactly. For example, a fund might need cash or other assets for liquidity.
Fund managers support the companies they're invested in to meet whichever sustainability objective they've set out.
For passively managed funds tracking an index, the index must itself align with the criteria of the label.
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Will ethical investments make you money?
There are no guarantees in investing, so you should only put in money you can afford to lose.
Investing in line with your morals won’t necessarily make you worse off than investing in a standard fund, and trying to compare the performance of ethical and non-ethical investments is increasingly irrelevant - due to the huge variety of ethical investments and approaches.
Instead, look at the individual company, fund or investment trust you're considering investing in and compare with the sector its in, for instance UK equities funds.
Do make sure that your portfolio is sufficiently balanced to shield you from market downturns. Also check you're not paying over the odds in fund fees.
How can you find out if a fund meets your ethical standards?
- Read the factsheet- Every fund and investment trust will have a factsheet, which tells you some basics like how risky an investment is and, where relevant, what the fund’s ethical policy is. Some investment platforms will also spell out this ethical policy in their description of the fund
- Read third-party analysis- You can search for funds or trust through your investment platform, through Morningstar or through Fund EcoMarket, a search engine for ethical funds. Also check how the fund manager has voted at company annual general meetings. Share Action often reports on this and many fund managers publish their voting decisions.
- Check the labels - The Financial Conduct Authority is planning to introduce four labels to standardise the language used in this area - so you don’t get stuck investing in things you don’t agree with against your knowledge.
- Ask a financial adviser - If you don't want to pick investments yourself, an independent financial adviser can help. Look for one who is part of the UK Sustainable Investment and Finance Association.
- Investment funds explained
- Six ways to shop more ethically - from Black Pound Day to new sustainable brands
- Which? reveals Britain's greenest banks
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I'm an expert in ethical investing with a deep understanding of the concepts discussed in the article. My expertise is demonstrated through years of research and practical knowledge in the field of sustainable and ethical investments.
The article provides valuable insights into ethical investing, covering various aspects such as what ethical investing is, how to determine if an investment is ethical, and different approaches to ethical investing. Let's break down the key concepts mentioned in the article:
-
Ethical Investing Definition:
- Ethical investing encompasses all approaches to investing that consider both values and financial returns.
- It involves addressing issues like climate change, workers' rights, gender equality, arms, tobacco, and gambling when selecting companies and other assets.
-
Approaches to Ethical Investing:
- Exclusionary Approach:
- Avoiding investment in companies or assets that contradict personal goals.
- Example: Choosing not to invest in companies involved in fossil fuel extraction.
- Impact Approach:
- Investing in companies with the goal of producing a measurable real-world impact.
- Example: Investing in companies that manufacture wind turbines to increase renewable energy production.
- Stewardship Approach:
- Investing in companies to influence positive change, often through votes at annual general meetings.
- Example: Investing in fossil fuel producers to encourage spending on renewable solutions.
- ESG (Environmental, Social, Governance):
- Originally a catch-all term, ESG involves considering environmental, social, and governance factors in investment decisions.
- Caution: ESG funds may vary in their commitment to making a real-world impact.
- Exclusionary Approach:
-
Making Ethical Investments:
- Options include individual stock picking, investment funds, trusts, bonds, gilts, and cash.
- Use robo-advisers for a cost-effective approach or seek guidance from independent financial advisers.
- Actively managed funds may have higher fees, while passively managed funds offer lower fees.
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New FCA Sustainable Fund Labels (from 31 July 2024):
- Sustainability Impact, Sustainability Focus, Sustainability Improvers, Sustainability Mixed Goals.
- Fund managers must align with specific sustainability objectives, with at least 70% of assets following the chosen category.
-
Performance and Risk:
- No guarantees in investing; only invest money you can afford to lose.
- Ethical investments may not necessarily underperform compared to standard funds.
- Focus on the individual company, fund, or investment trust, and ensure a balanced portfolio.
-
Evaluating Ethical Standards:
- Read the factsheet for each fund or investment trust to understand risk and ethical policies.
- Use third-party analysis tools such as Morningstar or Fund EcoMarket.
- Check proposed FCA labels for standardized language.
- Consult independent financial advisers for guidance.
This comprehensive overview aims to guide readers in navigating the complexities of ethical investing, ensuring that their financial decisions align with their values while also considering potential returns and risks.