How to invest ethically in 2016

Historically some of the best performing stocks have come with ethical baggage. Knowingly or unknowingly many investors have supported conflict, climate change, poor health, inhumane labour and addiction through investment in arms, fossil fuels, tobacco, alcohol, gambling, sugar and sweatshops. 

 How to invest ethically in 2016


Historically some of the best performing stocks have come with ethical baggage. Knowingly or unknowingly many investors have supported conflict, climate change, poor health, inhumane labour and addiction through investment in arms, fossil fuels, tobacco, alcohol, gambling, sugar and sweatshops. 

Historically some of the best performing stocks have come with ethical baggage. Knowingly or unknowingly many investors have supported conflict, climate change, poor health, inhumane labour and addiction through investment in arms, fossil fuels, tobacco, alcohol, gambling, sugar and sweatshops. 

Deloitte’s Millennial Survey shows that most millennials (those born between the early 1980s and early 2000s) see social impact as one of the most important roles of business. This is why some are predicting a big change in the financial markets as a new generation look for different kinds of returns on their investments. They’re looking for ways to use their capital not just to grow wealth, but to express social, political or environmental values.

Sin stocks

The Barrier Fund (VICEX), previously known as The Vice Fund, is a mutual fund that invests in 
companies involved in tobacco, alcohol, gambling and arms. The fund was launched in 2001 and fund manager Gerry Sullivan says the fund has adopted its approach purely to raise assets rather than attract attention. The Barrier Fund has consistently and considerably outstripped the performance of the FTSE 100 over the last five years.

The related industries are considered to have a high barrier to entry, which is what inspired the re-brand. 

Read more: Standard Life: How ethical investing is changing for the new millennium

This barrier to entry arguably makes incumbent companies much safer in their markets than companies who operate in industries where upstart competitors can steal market share more easily.

With such performance it’s no surprise that “sin stocks” are popular, with research by SigFig indicating that 1 in 8 investors own at least one.

While many will continue to favour the growth offered by these sectors for many it is time to take 
responsibility for the impact their investments have on the world. Impact investors accept that government and philanthropy isn’t enough to solve the world’s problems, and research shows that  investors’ appetite for ethical investment is growing. 

Impact investing is all about putting money into companies, organisations and funds that can offer: 

1. Measurable social or environmental impact

2. Asset growth or income 

Diligence

There is a range of ethical and socially responsible mutual funds and ETFs available in the marketplace for “impact investors”, but they also need to show diligence to ensure their money is working for their values.

Ethical fund managers have been found to be investing in fossil fuels, for example. Advisers Barchester Green produce an annual ‘Winners and Spinners’ report that names and shames ‘ethical’ funds that aren’t delivering ethical asset allocation and growth.

Avoidance and affirmation

The main way that managers choose ethical opportunities is by negatively screening stocks relating to fossil fuels, climate change, gambling etc. but is this enough? The best ethical funds not only avoid investing in bad things, but look for ways to make investments for positive impact.

One of the key ways that fund managers can ensure that their investments are ethical is through communication with companies that they invest in. This way managers can ask questions about specific business practises and ensure that they fit with investor expectation. 

Responsible growth

But can ethical funds deliver the kind of returns that investors are looking for? In short, yes.

There are good reasons to invest in renewables, even without the ethical considerations. It’s inevitable that fossil fuel extraction must come to an end, and when it does those who have invested in renewables can reap the rewards. Fossil fuels might be a good investment right now but if governments banned extraction just imagine what could happen.

The EdenTree Amity UK Fund is one example of an ethical fund that has performed over the last five years, with annualised growth of between 8 and 25%. It proves that ethical investing can be profitable and that Socially Responsible Investment (SRI) screening can identify businesses that have bright futures ahead of them.

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