Investors share the common goal of maximising the level of return for a particular level of risk. Yet ethical concerns are also an increasingly important consideration for many British investors. You may have seen terms like ESG investing or socially responsible investing (SRI). Despite the use of different terminology, ethical investing overall involves choosing companies that align with shareholders’ ethical views or values.
How strong are your beliefs?
But there’s an overwhelming choice of stocks to invest in and one approach may not necessarily fit all.
More and more businesses and investors are becoming aware of the environmental and social impact of their choices in both their professional and personal lives, but shareholders may have different lines in the sand when it comes to ethical investing.
For example, a group of investors may simply decide to avoid so-called sin stocks, that is, companies involved in areas like tobacco, alcohol, gambling, or firearms. Others may also decide to exclude businesses that are involved in controversial human rights issues, animal testing, nuclear energy development, or intensive farming. Corporations that damage the environment understandably make the news headlines on a regular basis.
A person’s political leanings could also influence what is considered as a sin stock. And some investors may simply prefer companies with overall positive social behaviour rather than excluding stocks simply on the basis of certain products or practices.
Measuring ESG investing criteria
According to academic literature, there are large differences in the definition of sin stocks or ethical investing. To ensure that a firm is socially responsible, it is important to express the principles of corporate social responsibility (CSR) in measurable variables.
However, as there is no single concept of sustainability, there is no commonly accepted single method of measuring it either. Either positive or negative screens can be used to assess shares from an ethical viewpoint.
For example, launched in 2001, the FTSE4Good Index Series measures “the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices”. A wide range of indices can be found on the website of FTSE Russell.
Also in the UK, Business in the Community (BITC) and Global Reporting Initiative (GRI) have introduced guidelines to ensure consistency in the disclosure of environmental information.
There are now different funds that aim to address a wide range of social convictions of individual investors. So having established that, let’s take a closer look.
Investment choices
The FTSE 100 index comprises diverse sectors, including consumer staples, energy, financials, healthcare, property, mining, telecom, and utilities, and not all companies in the index may feature high on the watchlists of investors who would like to pay attention to SRI.
But ethically-oriented funds have become a welcome addition to the asset universe, providing many investors with an easy one-stop-shop for socially responsible investing alternatives.
In addition to socially responsible criteria, these funds may have sectoral or geographic weightings. Therefore investors should study their marketing materials as well as fees carefully.
In the UK, several examples would include the ASI UK Ethical Equity Fund, BlackRock BGF Nutrition Fund, and BMO Sustainable Opportunities Global Equity Fund. But we’re not finished yet. There’s also Impax Environmental Markets Trust and Liontrust Sustainable Future Global Growth Fund. And let’s not forget Stewart Investors Worldwide Sustainability and Troy Trojan Ethical Income.
