It’s rare for a day to pass by without hearing a new proposal to help save the environment. Our morals and ethics often summon us to ‘do our bit’. However despite the efforts being made, it seems the world’s many problems show little sign of dispersion.
The ethical problems we are warned about do not stop at global warming and environmental pollution. We are often encouraged to also avoid companies seen as unethical due to testing their products on animals, questionable lending practices or gambling. These are all personal choices that we can make based on our beliefs and ethics. But how many of us know that we can extend these ethical beliefs to our investments?
What is an ethical fund?
An ethical funds is “any fund which decides that shares are acceptable, or not, according to positive or negative ethical criteria (including environmental criteria)” as denoted by the Ethical Investment Research Service (EIRS).
This gives environmentally or ethically conscientious investors the opportunity to apply their ethical beliefs to choosing the funds that they invest in. Ethical funds must meet additional social, ethical or environmental criterion in addition to the other investment criterion. These funds are described as SRIs (socially responsible investments.)
These type of ethical funds are divided into categories based on their level of green credentials in order to help investors make informed decisions when choosing their SRIs.
Light Green investments
Light green investments are at the lowest end of the scale. These type of investments often avoid company sectors such as gambling, pornography, arms manufacturers, military, defence and usually nuclear energy.
As the bottom step of the green investments ladder, light green investments often include controversial sectors where opinions are largely divided. These tend to be excluded from the higher level of SRIs.
Medium Green investments
Medium green investments play the middleman of the ethical fund. There is some overlap between light green and medium green investments. However medium green investments often avoid companies such as tobacco and oil/gas companies often fall under this sector.
Dark Green investments
Dark green investments give investors the highest level of ethical assurance by adhering to the strictest ethical criterion. Investments included in the dark green banding filter out all sectors deemed unethical but also look at additional areas such as checking that human rights are correctly adhered to in these companies and that there is no evidence of child labour or other breaches. Other factors like animal testing and genetic engineering would also be avoided in this sector. Promotion of renewable or sustainable sources is often favoured.
All of the different types of green investments are based on ‘negative screening’ of companies; exclusions criterion in order to refine the ethical credential of companies invested in.
Positive screening however chooses companies based on their ethical positivities. Companies which are actively engaged in ‘doing good’ such as water purification, solar energy or recycling sectors are likely to fall into this category.
Is it worth it?
Not everyone is concerned about the ethics of their investment however if you are someone who is environmentally conscious or feel strongly about investing in certain sectors then assurance that your investment is ethical may offer you peace of mind.
As with all investments, it is important that you do your research and are inform yourself fully before making any decisions. Speaking to an ethical investment advisor could offer you additional information and help you to consider the option which works best for you.
It is important to acknowledge that the returns on ethical investments are often lower than traditional investments. These investments also carry all the same risks come with other investments and you should be aware that you are not guaranteed any returns and could lose your capital completely.