Why you need to Invest Ethically

The world is becoming more ethically conscious, we worry about our impact on the environment, does a company have good working practices? We should also look at gender and race pay gaps and board room make up – are their women or individual of colour in senior management positions? Below are 5 things to consider if you want to make your investing ethical.

Contents

  • Decide your ethical position
  • Ethical industries
  • Look at your pension
  • Inclusive organisations
  • Will ethical investing make me money?

Decide your Ethical Position

Before you start looking into companies, stocks and funds you first need to figure out for yourself your ethical position – what are you happy to invest in? A big part of this is education. You need to not only figure out your initial position but be able to defend it, and the only way you are going to be able to do that is by reading and learning about the issues you care about. If you cannot defend your position then either you need to revisit your thoughts on it, or you need to learn more about it.

This may seem obvious or self explanatory but too often will you see someone invest in a company or fund before having thought about what they are investing in. A good example of that is investing in an “ethical fund” but then finding out that the fund invests in a company you disagree with.

Ethical Industries

What makes an industry ethical? This can be a highly subjective question. The energy sector could be considered an easy case study as it is split into renewable and non-renewable sources. The majority would agree that the production and use of non-renewable energy sources such as oil and gas are not ethical. Both their production and use have extremely damaging impacts on the environmental and human and animal health. With renewable sources there are still concerns but it is generally agreed they are the most ethically acceptable choice. Nuclear is a debate amongst itself.

Your own personal experiences and values will influence your own ethical opinions. This could be seen within industries that produce weapons or military equipment. On one hand many people will see this industry as highly unethical due to the potential harm it can cause. On the other, though, many will agree that military forces are a necessary thing to have in the current world and they need to be equipped by these companies.

What industry or company you deem to be ethical or acceptable enough for you to invest in should be determined by detailed research and your own experiences and values.

Look at your Pension

It is easy to manage you investments in a brokerage account or ISA as you are likely to log into it often and monitor your positions. Therefore, you have a high level of control over where your money is going. Pensions, however, are generally not managed as closely.

A lot of pension providers such as NEST will invest your retirement savings in a default fund when you first join their scheme. This is done typically to protect your savings while at the same time trying to grow them. This does have two problems; first, the fund will typically have a low growth rate, second, you could be investing in companies that you would deem to be unethical.

Both of the issues highlighted mean that you need to pay attention to what you retirement savings are invested in. Luckily if your savings have been put into a default fund, it is generally easy to switch funds. It is usually a case of logging into your pension provider’s website and then going to your retirement saving section and picking a fund to switch to. Just make sure that you have read the Key Investor Information of the fund that you are switching to so that you know what you are investing in. Even after doing this you should continue to monitor your pension savings to ensure you are happy with what they are invested in.

Inclusive Organisations

Social issues such as gender and racial pay gaps have been around for years, but recently have had renewed attention. Ethical investing not only includes environmental concerns or weapons sales but also how inclusive a company is. Does a company have women or people of colour in senior management positions? Are they inclusive of employees who have disabilities, do they have progressive HR policies such as maternity and paternity leave. All of these factors can and should be looked into when assessing whether a company is ethical.

According to an Accountancy Daily article in July 2020, in 2019 the ten worst reporting companies within the FTSE 100 had an all gender pay gap of over 40%; the all gender bonus pay gap was worse at over 75%. HSBC had the worse gender pay gap of 55.1%.

In terms of diversity among the top UK companies, white males make up 62.% of boards and occupy 83.8% of executive directorships. White females make up just 28.2% of boards, male BAMEs 6% and female BAMEs 3.8%, according to The DiversityQ FTSE 100 Board Diversity Report 2020.

All of this research should be conducted when determining whether you want to invest in a company, alongside their financial reports.

Will Ethical Investing Make Me Money

Comparing the returns of ethical and unethical investments has become increasingly irrelevant due to the fact that there are so many ethical investments. You don’t have to invest in an oil company to make money, if anything long term it may lose you money. Investing ethically, like with all investments relies on good research and due diligence. There are many established ethical funds that have been around for 10+ years who have returned positive growth.

There are many individual companies that you can invest in that may meet your criteria and still grow long term. Some potential examples include large tech companies who are increasingly environmentally conscious. There is no reason why you cannot get a good rate of return from an ethically minded portfolio.

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