Ethical investing or Socially Responsible Investing (SRI) is a booming market driven by consumer demand and an increasing awareness of social responsibility - both personally and corporately.
If you are a member of a government controlled pension fund, you may be "investing" ethically already as there is increasing pressure for funds such as these to take a socially responsible stance.
However, we are experiencing is an increasing demand by clients to invest proactively in a socially responsible, ethical manner and, just as importantly, produce a good return on their investment.
Putting it very simply ethical investment is a way of investing which attempts to maximise social good and financial return. To do this you will find that funds typically favour investments that are environmentally positive, promote social justice and where the company involved demonstrates good corporate governance.
On the other hand you will see certain sectors such as alcohol, tobacco, gambling and weapons being actively excluded from many investments.
The first ethical fund in the UK was launched by Friends Provident in 1985. Since then the market and your choice has increased hugely. If you have a look at the market you will see that most of the major players have launched socially responsible funds. Although the increase in choice is great news for you as consumer it has sometimes made it difficult for you to understand what "ethical" actually means as each provider may have a different definition of what constitutes an ethical investment. It all comes down to what selection criteria they employ and what investment strategy they follow.
Broadly speaking there are four investment strategies employed. These are:
Negative Screening - here certain companies aren't even considered as part of the overall portfolio. For example the manager may decide that tobacco producers or arms manufacturers have no place in the fund.
Divesting - here the manager actively monitors the "behaviour" of companies within the fund and based on ethical, non financial considerations may chose to remove the company from the portfolio.
Shareholder Activism - the shareholders attempt to co-operatively steer company management towards more socialy responsible behaviour if required.
Positive Investing - the investment fund looks to invest pro-actively in activities and organisations that, potentially, could have a positive ethical impact.
One word of warning, when selecting a group of ethical funds take care that there is not duplication of underlying stocks in the funds. Small companies are much more likely to meet the ethical criteria around employment and environmental practice, than large companies. For example, in the technology funds sell off from 2000-2003 ethical funds were particularly hard hit, as they held a large proportion of small, recently formed technology companies.
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