Ethical investment is, in its most succinct form, the practice of applying screening criteria to a fund in order to assess potential investment opportunities.
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. This can be a decisive factor in mitigating stock-specific risk. The UN Principles for Responsible Investment encourage 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 the near future in a way that may sacrifice long term prosperity, and perpetuate instability and risk.
The benefits of combining both positive and negative screening when scrutinising investment decisions are considerable. It may also 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.