As the world has become more aware of green issues – climate change, destruction of the environment, health, and the reduction in natural resources – both at a governmental and individual level, so, too, has the requirement for ethical investments.
A person may shop for only organic foods on the basis of lifestyle choice. This choice may also dictate in which shops that person spends his money. It follows through that investment decisions may also be dictated by lifestyle choice. But this type of investing (known also as socially responsible investing) also offers some eye opening potential returns, as well as being ideal for those more ethically minded investors.
What considerations does an ethical investor have?
What we have mentioned above is very broad brush areas of concern, such as health and environment. More specifically, ethical investors might shun the shares of alcoholic beverages companies, or tobacco producers. Perhaps supporting the stocks of arms manufacturers, gambling organisations, mining companies, and the pornographic industry would be anathema to the ethical investor.
There are no hard and fast rules, however, and ethical investors might choose different levels of ethics to abide by, just as some people don’t eat red meat, whilst others don’t eat any meat, and others shun all dairy produce. An investor might pick out the most ethically aware companies in a sector of the economy: perhaps, for example, the mining company with the best environmental sustainability model. Then again, he might select to invest in the most proactive combatants against unethical practices.
Companies that work for sustainable forestry projects, social housing builders, and renewable energy producers, amongst others, are all types of companies that might appeal to an ethical investor.
The increase in ethical investments
Governments are being forced by worldwide initiatives, such as Kyoto, to accept and adopt greener policies. Taxpayers’ money is being pumped into green investments, and this has helped to create widening ethical investment opportunities.
In the United States, the number of ethical mutual funds grew by 45% between 2007 and 2010. During the same time, the number of Exchange Traded Funds dedicated to ethical investments ballooned by over 75%. In the UK, this growth has been even more spectacular: there are now more than 130 ethical funds available to the UK retail investor. According to the Ethical Investment Products Report, total revenues in the sector between 2007 and 2011 were over £1.2 billion, growing at 9.6% per annum. This rate of growth is expected to slow, but still remain above 6.5% per annum through to 2016, and that is way above the growth expected in more ‘traditional’ sectors.
How ethical are you?
How has your attitude to life, health, and environmental issues changed over the years? Have you stopped smoking, or drinking? Do you buy organic foods, or shun meat? Do you refuse to shop at stores which use cheap foreign labour to produce the goods they sell? Are you more energy conscious now: perhaps you use energy saving light bulbs?
Answering these types of questions will help you assess your ethical attitude to investing. For example, if you don’t smoke, why would you want to own shares in a tobacco manufacturing company? Decisions might be for the long term, or perhaps more short term.
Use a wider approach
As the world pushes toward a greener and more ethical stance, so, too, are existing companies. For this reason, many ethical investors will invest in what at first would appear to be no go areas, on the basis of the progress those companies are making toward greater sustainability.
Investors can take a domestic or global view, and FTSE produces a range of indices based upon ethical approach to business, including carbon strategy companies, and an environmental markets index. The companies that form the constituents of these indices are the most ethical in their field, taking into account areas such as global warming policies, staff diversity, community involvement and vision, and corporate practices.
Selecting the shares of investments within these indices will produce a selection of the most ethically minded companies within their relevant business sector. Of course, a google search for ethical funds will produce a plethora of information to help the ethical fund investor in his decision making.
The advantages and accessibility of ethical investing
Should you decide upon a more ethical approach to investing, you may set upon a course of negative screening – removing the ‘sin stocks’ from your portfolio – or positive principles – investing in socially responsible companies. There are a large number of companies that fit both approaches, and in keeping with your lifestyle.
A growing number of investors choose to invest ethically, and this number is likely to continue to grow, further boosting the market and demand for such stocks.
Laws are being updated on an almost daily basis that impact on companies, ethical or not. Advertising for tobacco and alcohol companies is further restricted, or penalties on companies that emit too much carbon are introduced.
There is no need to believe that investment opportunities are restricted because of socially conscious thinking. Companies that fit the bill for investors with a green or socially responsible approach are growing in number, and for those investors that either do not have the time to commit to research or don’t feel confident in doing so, there are growing numbers of funds that invest with an ethical approach.