We help you navigate your way through the maze of different 'investing for good' options.
The world of ethical investing is a minefield for investors to navigate, not least due to a variety of terms and phrases used by the fund management industry. The lack of common language acts as a barrier and can leave investors scratching their heads. The risk is investors will ultimately become disengaged with the process of finding a fund that fits in with their own values.
While the terminology can confuse, the fundamental principle of ethical investing (or however else it is labelled or described) is supporting businesses ‘doing good’. While the interpretation of this comes in many forms, one common approach is to invest in businesses making a positive impact to environmental and social problems.
Another barrier is the deeply entrenched view that returns must be sacrificed in order to invest ethically or sustainably. But, various pieces of research have shown this to be a misnomer, and instead found that investing ethically or sustainably enhances returns rather than detracting from them.
In order to help investors navigate their way through all the confusing technical jargon towards an ethical approach, interactive investor launched the ii ethical long list in September 2019, which contains more than 140 socially responsible and environmental funds, investment trusts and ETFs available on our platform. We also launched ACE 40, a rated list of ethical funds for retail investors wanting to better align their investments with their personal values.
There is also our Ethical Growth portfolio, which is designed to give investors an idea about how they can build their own diversified ethical portfolio.
To help you get a better understanding of ethical investing and the funds you are considering, we have put together a jargon buster to explain what some of the most commonly-used terms actually mean.
You can find the list below interactive investor’s definition of the three main investment styles.
Interactive investor ACE investment style*
Funds that focus on simply excluding companies, sectors or specific business practices
Funds that carefully consider an often wide range of ethical and/or environmental, social and governance (ESG) issues or themes when balancing positive or negative factors.
Funds that focus on companies delivering positive social and/or environmental outcomes
*A more detailed explanation of Avoid, Considers and Embraces can be found here.
Here are the most common investment terms you will need to get to grips with when investing ethically.
Environmental, social, governance (ESG): This is an acronym that you'll frequently come across when researching ethical investments and covers the three key core components of environmental concerns, issues around people and communities and governance – the ways in which businesses are run and managed.
Environmental/green investments: Some funds purely invest in companies that focus on ecology and the environment, as opposed to wider ethical concerns.
Impact investing: This is an investment made with the intention of it having a measurable environmental or social impact in addition to simply generating a profit. Investments will seek to tackle challenges in areas including renewable energy, sustainable agriculture or conservation. Alternatively, they might seek to improve access to basic services including housing, education and healthcare.
Sustainable/sustainability: SRI Services, a company that specalises in ethical funds, describes sustainable as “living, behaving, operating or investing in a way that does not risk damaging our long-term prospects or quality of life.” From an investment point of view it means identifying companies whose business is not risking our social and environmental wellbeing either now or in the future.
Socially responsible investing/sustainable responsible investing (SRI): This is a catch-all term used to encompass a wide spectrum of ethical investment strategies including social and environmental issues. Although the 'S' in this acronym initially stood for ‘social’ – implying a focus on 'people' issues, it's now more frequently seen to stand for ‘sustainable’ – reflecting greater interest in the environment and climate change.
Sustainable/sustainability: SRI Services describes sustainable as 'living, behaving, operating or investing in a way that does not risk damaging our long-term prospects or quality of life'. From an investment point of view, it means identifying companies whose business is not risking our social and environmental wellbeing either now or in the future.
Thematic investing: Some funds will have a thematic approach, investing in companies with a particular social or environmental theme such as water or renewable energy.
Other ethical investing terminology funds use
There are other techniques or strategies funds use, which we run through below.
Balanced-ethical: This describes funds that employ a range of ethical investment strategies. So, while they may rule out some stocks on ethical grounds, they will also actively seek out companies that are making a positive contribution to society or the environment. As such they will debate both the up and downsides of a business before they invest in it, taking a more open-minded approach to stock selection than some of the more traditional ethical funds.
Best in class: Rather than screening out companies based on strict ethical criteria, a fund with a 'best in class' approach won't rule out unethical sectors and will instead focus on firms with a better environmental or social track record than others in their peer group. This is a strategy that could be employed by a balanced ethical fund (see above).
Dark green: You may see ethical investments described in shades of green and it may not necessarily be related to its environmental credentials. A dark green fund will have very strict approach, avoiding any company or industry that does not meet its ethical criteria. This was the basis of the earliest ethical funds and usually involves excluding companies involved in mining, alcohol, tobacco, gambling, pornography and weapons or those operating in oppressive regimes.
Faith-based: Faith-based investments are designed to meet the specific needs of certain religious groups. The earliest ethical investment funds were designed for Quakers and Methodists by screening out issues including gambling, alcohol and tobacco. Islamic investors can also invest in funds that comply with Shariah law.
Light green: (See dark green above). A light green fund is likely to have a more flexible investment approach, seeking out companies that are doing good (taking steps to protect the environment for example or improving conditions for workers) as opposed to excluding companies that are considered to cause harm.
Negative screening: (See positive screening below). A fund that has a negative screening approach rules out companies that don’t meet its ethical criteria. It might also be described as dark green (see above) and is a strategy used by funds that seek to do no harm.
Positive screening: This is a strategy employed by funds that seek to do good – by searching out companies that are taking positive action, whether that is to improve or limit damage to the environment, engage with local communities or improve conditions for workers. Some funds may employ positive and negative screening (see above).
Responsible ownership or engagement: Some fund managers will seek to use their position as a shareholder in a company to drive change either through dialogue or by exercising their vote at annual or general extraordinary meetings (AGMs and EGMs). Issues managers will seek to engage with businesses on would include reducing damage to the environment, preventing climate change, encouraging equal opportunities, improving health and safety and protecting against bribery and corruption. They might also seek to tackle ‘fat cat’ salaries and issues around excessive remuneration.
Social: A fund that prioritises social issues will be looking out for companies that engage with local communities, look after their workforces and consider human rights.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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