Investing

Is ethical investing too difficult?

18 November 2020 | Posted by Hannah Duncan
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We’ve all heard of investing. Investing is essentially lending money or buying shares in a business with the aim of getting back more than we put in. But what about ethical investing?

Ethical investing is the process of investing in things that match with the investor’s moral compass.

Once a niche sector, sustainable investments are quickly growing in popularity. Ethical funds proved to be resilient overall in the COVID-19 pandemic. A study conducted this summer showed that on average they grew by 4.3% in value since the start of the year, compared with traditional investments which fell by 1.5%.

Ethical investing is also very personal, and the investments could be religious, environmental, political or social to name a few. Because of this, it’s not exactly clear cut, but some things tend to flow through most ethical investments. They’ll generally exclude things like weaponry, pornography, alcohol and gambling. This category of ethical investing is called negative screening, or “Socially Responsible Investing”.

There are other types of ethical investing too. In April 2020, 92% of advisors reported an increase in Environmental, Social and Governance (ESG) investing. And 88% expect it to increase further over 2021. This type of investing aims to do more than just exclude bad things, it tries to invest in good. There’s also a style called Impact Investing which aims to go further still and invest in positive, measurable change. Becoming an ethical investor is a great way to do your bit and put your money behind your morals.

In this article, we’ll reveal some top tips to help you select ethical investments.

Warning: It’s not always straightforward

Grand Designs host and designer Kevin McCloud recently wrote, “Sustainability is now a big, baggy sack in which people throw all kinds of old ideas, hot air and dodgy activities in order to be able to greenwash their products and feel good”. He’s not wrong. Building a portfolio which is truly ethical can be just as cumbersome and confusing as building a house.

60% of institutional investors believe that greenwashing, when companies deceive customers with misleading ethical claims, is the biggest obstacle to reaching our sustainability goals. Since more and more of us want to buy things which are good for the planet, there’s a financial incentive for companies to ramp-up their ethical credentials, even if they’re misleading. Many companies have come under fire for greenwashing, and one particularly bad culprit is fast fashion.

Coming up, we’ll look at how you can dig beyond the marketing and explore the real ethics of a company, with a simple checklist.

Ethical investing checklist

If you’ve got a company in mind that you’d like to check out, here’s a checklist:

1. Find out the essentials

If you’re planning to pour wealth into a company, it’s important to get to know it first. Some people jump on a stock because of rumours or market noise  which is not a good approach! Before considering a stock, explore: 

  • What is the company? 
  • Who are the main competitors? 
  • How is the sector looking? 

There are different ways you can find this information. The company website, recent news and objective data sites like MorningStar or MarketWatch are good starting points. Don’t be alarmed by all the graphs and jargon on the data sites, focus in on the company overview, performance, and management style to get started.

2. Research the management team

The management team makes the day-to-day decisions, so it’s useful to see if their ethics align with yours. You’ll be able to see who they are in the company’s Annual Report. Twitter and LinkedIn can be useful platforms to see managers’ opinions on world topics and events. You can also watch interviews and dig-up bits of press about them online.

3. Analyse the company’s financial performance

A good past performance does not equal a good future one. However, looking at how the stock has gone up and down in value is useful to see how it tends to react in different market environments. You can also look at the kind of world events which are good or bad for the stock and think about what the planet might be like years from now. You can find performance information on the data sites.

4. Look at the ethical performance

There are ratings agencies measuring how ethical a stock is. Some useful ones, with free tools, include Sustainalytics and CSR hub. At Claro, we use advanced research by a third party data provider to get in-depth ESG data on the companies in our portfolios.

Detecting greenwashing is important for ethical investors. If a company has vaguely ethical-looking pictures and words, without any solid information it could be guilty. And if the information is extremely hard to find… there’s probably a reason they don’t want to share it. 

Key takeaways

  • Investing in line with your values, or ethical investing, can be an impactful way to do your bit and make the world a better place … But it’s not always straightforward!
  • Greenwashing, when companies appear more sustainable than they actually are, is an obstacle that ethical investors will need to overcome. 
  • You can beat the greenwashers by thoroughly researching your investments before you take the plunge. Go beyond the marketing by looking for real examples of solid actions and put them into context. If you can’t find any evidence of sustainability, you may have a greenwasher on your hands!

When investing, your capital is at risk.

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