Ethical investing is often regarded as an all-encompassing description used to articulate an approach to investing which is regarded as socially responsible. Ethical investment is, in it’s most succinct form, the practice of applying screening criteria to a fund in order to assess potential investment opportunities, whether they are environmental, sustainable or thematic.
Traditionally, these ethical screens were negative in nature, excluding undesirable areas of the market, such as animal testing, production of armaments or tobacco, on a moral basis. In recent years, however, there has been an increased focus on inclusion of companies on positive ethical grounds, emphasising the importance of those which make a beneficial contribution to society and the environment, as well as being profitable.
Some ethical investment funds advocate a best-of-sector approach, which merits those companies possessing a superior corporate responsibility record to their peers in a given sector. This can be a decisive factor in mitigating stock-specific risk; The UN Principles for Responsible Investment encourages companies to develop sustainable business practices, reflecting a realisation that poor corporate governance, and a lack of environmental discipline, can lead to underperformance. Investors should always avoid businesses preoccupied with short-termism – a focus on maximising shareholder returns in near future in a way that may sacrifice long-term prosperity, and perpetuate instability and risk.
The benefit of combining both positive and negative screening when scrutinising investment decisions are considerable; it may provide reassurance that a client’s investment is not being used to fund an industry with which they fundamentally disagree, whilst offering exposure to companies whose activities are of long-term benefit to the communities in which they operate.
Ethical investing is an increasingly important investment theme in a world where social media has become a powerful tool in influencing investor behaviour. Investments or corporate practices that come under the spotlight for the wrong reasons, are often those we would like to avoid in advance. Our ethical screening practices can help investors meet their own socially responsible investment criteria, as well as reap the benefits arising from investment in businesses with a considered approach to their activities, and the impact of these on society at large.