Ethical investing is nothing new, however, in recent years – if not months – there has been more of a buzz around this topic. There are also questions around whether or not ethical portfolios perform as well as their ‘non-ethical’ counterparts. In answering this question it is necessary to establish what YOU mean by “ethical”. This isn’t easy because what is ethical to one person, is completely unethical to another. Ethics are based on human judgement and interpretation and are therefore completely subjective.
What is ethical investing?
In short, ethical investing is personal choice in terms of what aligns with your moral compass. This raises a number of conundrums:
Let’s take a manufacturing company like Raytheon UK; they are a good company to invest in as they are leaders in technical innovation in cyber, intelligence and weapons. As they don’t actually fire the weapons, some feel it isn’t unethical to invest in them. Other people would feel it is completely unethical, as the company provides governments with the ability to go to war.
And what about Nestlé? They have been on the naughty list since the 1970s when they were accused of getting Third World mothers hooked on milk formula, which is less healthy and more expensive than breast milk. The allegations led to hearings in the World Health Organisation, resulting in a new set of marketing rules. But are you a Nescafé drinker? Do you reach for a KitKat every now and then or enjoy a scoop of Häagen-Dazs? While boycotts against the company are still ongoing in various countries across the globe, the company claims it is in full compliance with the International Code of Marketing of Breast Milk Substitutes and therefore some might still consider investing in them ethical.
Not so long ago, people also chose not to invest in WH Smith because it sold pornography magazines – yet the fact they sold magazines about guns and ammunition did not cause the same moral concerns.
Finally, let’s look at electric cars – a great ethical investment opportunity as we move to greener sources of energy and look for ways to improve our environment. However, the energy we need to power the cars often comes from nuclear power stations and it’s currently impossible to dispose of the batteries responsibly. In the future, we will have a stock pile of things we don’t know how to get rid of and by solving one ethical question we have created another. So, is this really an ethical investment or not?
Only you can decide…
Can you really make money investing ethically?
Investing ethically really isn’t as simple as it looks. The FTSE 100 is trying its best but some companies are trying harder than others.
In 2016, only 23% of FTSE 100 companies provided shareholders and other stakeholders with any measure of ethical standards despite 94% stating a commitment to high ethical standards within their annual reports.
In August 2021, it was reported less than half of FTSE 100 companies had Codes of Ethics that were up to scratch, according to research by the Institute of Business Ethics.
While investors don’t want to be unethical, they still want to make a profit and rely on FTSE 100 rankings to determine where they should put their money. But Codes of Ethics are still judged on human perceptions of what is ethical and what isn’t, which leads us to question what is ‘ethical’ and from whose perspective.
Finding companies that support your values is the best place to start – regardless of whether their Code of Ethics is up to scratch or not. At the end of the day, you are looking to make a return on your investment and only you know what sort of returns you want to achieve. Therefore, you might need to ask yourself whether you are willing to sacrifice some of your conscience to make more money for your future comfort, or whether being ethical is your primary motivator.
Types of ethical investing
There are five main types of ethical investing:
- ESG (environment, social and governance)
- Socially responsible
- Sustainable living
- Impact investing (companies making a positive impact)
At the core of each of these investment types, is a way of investing that suits your personal choices and beliefs.
Are ethical funds expensive?
How expensive something is, will always be relative to the individual. Because of the work that has to go into ethical funds (to ensure they are indeed ethical and maintain a good ESG score) then they are what we call active funds. They undergo research and due diligence, which makes them more expensive than passive funds which by their nature, do not require as much work.
This is a term you might have heard a lot of in the news recently and is refers to deceptive ‘green’ marketing and PR an organisation uses to persuade the public that their aims and objectives are environmentally friendly. Greenwashing can often persuade ethical investors to put their money into a company that isn’t green at all.
How to build an ethical portfolio
The best way to invest ethically is to create your own portfolio that aligns to your own values and beliefs about the environment, about impact and about what is morally right. Ethics are so varied and diverse, there will always be a way to salve your conscience whether you use the money you earn to build an eco-friendly home or donate more to charity.
The point is no one can tell you how to be ethical. It is and always will be, a personal choice.
It is perfectly possible to build a successful, profitable investment portfolio of ethical investments. How ethical that portfolio is, is a personal choice. Will it be as profitable as a “non ethical” portfolio? Possibly not because a focus on ethical often means that companies involved are new, not yet profitable or their product is in its early stages of development and take up by the general public.
However – that may be a trade off we are willing to make to ease our conscience in pursuit of a greener planet?
Middleton Private Capital can accommodate every wish and build bespoke portfolios with a flexibility to incorporate what is ethical to you. We would be delighted to discuss your investment aims at any time.
Click here for more information about how we can get started together.