Ethical Investing: The Basics

Ethical investing is a great way to support your beliefs, whether it’s sustainability, fair trade practices, the environment or human rights. This type of investing considers the environmental, social and political implications of your investment and screens or excludes certain areas.

What’s the difference between ethical investing and normal investing?

Ethical funds will usually exclude companies and sectors that do not line up with a fund’s ethical priorities. This can mean that there is a smaller number of companies to choose from, meaning these investments are potentially less diversified. Many of the companies invested in may also be of a smaller size.

However, ethical investing often takes into account the long-term implications of investments, which may prove more beneficial for those looking to invest in companies that are prepared for environmental, social and economic changes of the future. There are many ethical funds that have performed just as well as other funds, meaning that it is possible to receive a good return on your ethical investment as well as make the world a better place.

How does ethical investing work?

Often, funds use screening for ethical and sustainable investments, either by an exclusionary or an inclusionary method.

Exclusionary, or “negative” screening, refers to picking and getting rid of the unethical or unsustainable investments in order to focus on those that are more likely to conform with ethical principles. Often, this will exclude companies in certain sectors, such as weapons or tobacco.

Inclusionary, or “positive” screening, refers to actively selecting companies that use ethical or sustainable practices. This is where the fund manager will look for companies and favour those who contribute positively to environmental causes, for example.

What should I keep in mind?

It should always be noted that every investment, no matter its ethical stance, can fall as well as rise. This means that you may get back less than the amount that you invested in the first place, and no investment comes without risk.

It’s important to look at your own preferences for ethical investing as well as your attitude to risk before you get started. If you’re looking for financial advice regarding ethical investments and funds, talk to our financial advice team. Please call on 01926 492406 or email us at enquiries@klofinancialservices.com to make an appointment.