Here’s What You Need to Know About Ethical Investing

We recently teamed up with Ryan King from Making Money Simple, to give you the essentials on ethical investing. From what it is, to getting involved and what it means to your portfolio. As with all investing, your capital is at risk.

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Over the last couple of decades, investing has become cheaper and more accessible than ever. Gone are the days of needing thousands of pounds or being in a position of power to start investing. As time has gone on, we as investors now also have a lot more choice. This choice includes thousands of different shares and thousands of funds we could invest into, with NuWealth offering a selection of both shares and funds. One newer choice, which has grown in popularity in recent years, is ethical investing. 

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What is ethical investing?

‘Ethical investing’ is an umbrella term. ‘Socially responsible investing’, ‘ESG investing’ and ‘impact investing’ are just three of many approaches to ethical investing that you may have heard of. Broadly, it is a style of investing that is focused on investing into companies that aim to have a positive impact on the world.

It may be easier to ask: what is not ethical investing? Arms companies that make weapons, ‘sin’ companies that make tobacco or alcohol, companies that use child labour to make products, and so on, are considered unethical by most. Although it is worth saying that what is ‘ethical’ is subjective. There’s certainly a spectrum and what you find unethical may be more ethical to someone else. This brings us on to the two main ways to approach ethical investing.

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Positive vs Negative screening

When it comes to ethically investing in practice, there are two approaches.

Positive screening is specifically picking companies or industries, choosing the ‘best in class’ and investing in those. This could be choosing companies that you know don’t abuse animals or that you know are using sustainable energy. NuWealth offers an ethical fund called The Future of Food. This fund invests into 11 companies, companies that are innovating to create a more sustainable, safe and fair food system for the planet.

Negative screening is excluding specific companies or industries. This could be excluding all tobacco-related companies or all gambling-related companies from your investment strategy. You could also use a combination of the two approaches, negatively screening industries you will exclude whilst positively selecting the best ethical companies to invest into, as an example. Now you know a bit more, what are some pros and cons of ethical investing?

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Pros and cons

One clear pro of ethical investing is that you can invest into things you value, or more importantly not invest into things you don’t like or support. But, one con is that it may be difficult to know if a company or a fund is truly ethical. You may have to research the company or fund to see if it truly fits your values, and is ethical in practice. This could be time-consuming, particularly if a fund consists of hundreds of companies. Another pro is that we would expect more sustainable, ethical companies to stick around. Over recent years, there has been a huge shift of companies reporting figures such as CO2 usage in their financial statements as stakeholders are becoming increasingly concerned with protecting the environment. So, you may have more success with ethical investing if you’re investing for the long term as a greater emphasis is placed on these ‘ethical measures’ over time, and we could expect the ‘better’ ethical companies to perform more strongly as investors value good performance in these ethical metrics. However, by only investing into more ethical companies you could be missing out on great gains from more unethical companies.

Through NuWealth we can invest into Amazon stock. Some people may not want to invest into Amazon due to rumours of how they treat their employees, yet Amazon is up 300%+ in the last 5 years. Of course, if a company that you see as unethical performs well you very well may choose to prioritise returns, but it’s something to think about.

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Do returns differ with ethical investing?

Short answer - yes. The returns you receive from investing ultimately depend on what you are investing into. So if you’re only investing in ethical companies then this will impact your return, whether for good or bad. Unfortunately, it’s impossible to predict future returns. However, from history, we know that we can expect around 7-8% per year over the long term if we invest into a broad basket of stocks. Hence, if you’re positively screening ethical companies to invest into, and only investing into a few shares, then you may not be very diverse and your investment returns will depend solely on these companies. If you’re negatively screening funds to invest into, excluding tobacco companies for example and investing into all other industries through a ethical fund, then you’re much more diversified as this fund should include hundreds or even thousands of stocks. So over the long term you’re more likely to be closer to this 7-8% average. 

However, the way the world is moving, with investors becoming more likely to allocate their money to companies who are trying to bring about the greater good, I would hazard a guess that we could expect better returns from more ethical companies over the long term. 

Conclusion 

This is the basics of ethical investing. The main benefit is that as we have so much choice in 2021, with ethical investing being one, we can specifically choose to invest into and support companies that are aligned with our values. NuWealth are fans of ethical investing and through their platform we’re able to invest into a range of ethical shares and funds.