Investing to ‘do good’ in socially responsible funds can still be a challenge

With a growing number of investors choosing ethical investments, our Head of Portfolio Management Matthew Brown considers some of the challenges.

Investing to ‘do good’ in socially responsible funds can still be a challenge

Investing to ‘do good’ in socially responsible funds can still be a challenge

People who care what their hard earned cash gets up to behind their backs and would prefer it to be ‘doing good’ have been turning in increasing numbers to ethical investment funds to generate a return on their savings. Faced with the range of ‘sustainable investments’ and ‘socially responsible’ funds available, knowing where to begin when there are so many causes to care about can be a challenge.

The whole concept of ethical investing is very subjective and to find the best fit as a caring investor you must first examine the causes you care about and have a vision of the world you want to live in. Some savers actively want to invest in line with their own environmental or humanitarian values, others look to avoid investing in those companies that flout them. If animal testing enrages you then you will almost certainly screen out those companies from your portfolio whose businesses currently rely on it. At the same time you might seek out green energy companies that share your vision of environmental sustainability.

Whatever our passions and view of the world, ultimately we all invest in the hope of growing our savings. Today, there are a growing number of ethical funds that offer an increased level of diversification which is an important factor of investing, but choosing only ethical investments is limiting and so could potentially have an automatic increased risk level.

It is important to understand that returns from ethical investments vary significantly and there is no guarantee that they will perform any better, or any  worse for that matter, than the market as a whole.

There are different strategies you can adopt to select investments in line with your environmental, social and governance standards. For example, you may decide to only invest in certain industries such as green technology, or choose to avoid specific areas such as tobacco or armaments. Either way, the choice available to you is not simple. Do you exclude retailers who sell tobacco products or the companies that make the packaging from your portfolio as well, or just the manufacturers of the tobacco product? Do you include the tobacco company if it is environmentally green, because this is more important than excluding it because of what it manufactures?

You could be forgiven for expecting that businesses which appear to address social issues and global concerns will avoid unethical practices and treat employees well. But of course this is not always the case and you need to understand how important this is to you when making investment choices. Not only that, you need to consider how to monitor and control the practices of the company and how you will ensure a fund that you are invested in continues to remain aligned to your views.

Although socially responsible investing might seem an ideal way to feel better about your investment choices, there are issues as well and you may have to be satisfied knowing there is no quantifiable way of assessing the impact your money is having.

If your idea of “doing good” with your money is to ensure future generations are catered for, a trust or other intergenerational wealth planning strategy might be an option. This may include some form of socially responsible or ethical investing if this remains towards the top of the priority list.

If you would prefer to see first-hand the benefits of your investments, then setting up a Charitable Trust may be an option. That way you will set the boundaries on what can and can’t be invested in at the same time as benefitting a certain part of society.

If you are in a position where you still require your money to work for you and are not in a position to make gifts or transfer assets elsewhere, then becoming a Trustee on a trust that holds the same views as yourself is an option. If this is new to you, there is support available to help you navigate the requirement of being a trustee.

So, even as socially responsible investing is on the up, and may be worth exploring as part of your plans, it is worth taking a step back to consider what it is exactly that you want your money to do as there are other options available and you may benefit from some professional help to guide you through the maze.

This article was first published in the Scotsman on 31st May 2019 


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