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‘Green-Screening’ your future investments: Why ethical investing is important to understand

This article provides an an in-depth look into how you can ensure that your important investments are done both ethically and efficiently.

Written on 1 July 2021

People all around the world have never been as green-conscious as we currently are in 2021. We know and track exactly how our plastic usage effects the earth, and how our unnecessary car journeys should gradually be cut down. But what about our money practices? How much is our lack of research into where our investment money goes really impacting our surroundings?

Below is an in-depth look into how you can ensure that your important investments are done both ethically and efficiently.

Please be aware that the information contained in this article does not constitute advice. You should always seek independent advice before making any investment decisions.

What exactly is ‘ethical investing’?

Investing ethically does not necessarily just mean investing strictly into organisations that are committed to having a positive impact on the society and the environment, but more about simply ensuring that your investments are not funding the opposite.

In a nutshell, Ethical Investing is making sure your investments are not contributing to either something negative that you do not morally support as an individual, and/or that will cause a negative impact on the environment and socially.

Whilst doing this, you can then attempt to find the perfect balance between investing your money well and hopefully, to profit, while also being ethically responsible and in-the-know.

How do I know that what I want to invest in is ethical?

A type of ‘screening’ process can be held on your investment choices which is called ‘ESG investing’ (‘Environmental, Social and Governance’). This will be carried out by one of the ESG funds of your choice.

These three factors listed above are focused on specifically two main areas;

  • exactly how a company’s products and services can effectively contribute to sustainable development
  • the company’s risk management in how it structures its own operations in order to minimise any negative impact

Environmental issues are evaluated and weighed against what the global productions/consumption would be of that company, considering how exactly it is contributing to climate change through the means of things such as pollution, resource depletion, waste, and de-forestation.

Social issues are evaluated to assess factors such as the conditions of the workplace, diversity issues, health and safety and having a general responsibility to the employees of that workplace.

The Corporate Governance can provide long-term benefits for not only the employees and company investors, but for society as a whole. This can be done by evaluation of any issues involving things such as tax, management, bribery/corruption, and shareholder’s voting rights.

An ESG fund will always prioritise seeking out their targeted companies by which are most profitable first. Only then would it then be screened to ensure it is an ethical investment for you to make.

Different ESG funds are suited to different individuals, ultimately coming down to the risk tolerance of that person and what risks they feel comfortable taking financially.

As well as this, in the midst of the COVID-19 pandemic, the long-term success of these may be slightly different to what their usual projections are, meaning it is all the more crucial to consult with an IFA when choosing the one for you.

Is ESG investing the only way to do this?

In short, no, there is a more simplified way to ensure you maintain social and environmental responsibility, but not without losing some meticulousness.

In the case that the stakes are much lower, and thoroughness is not essential in the case of your investment, this may be a better option for you.

Socially Responsible Investing (SRI) involves screening out non-ethical companies in a much broader sense. It can pinpoint businesses within a particular sector, that are shown to have the most social and environmental responsibilities in comparison to others in the same field.

What are the main pros and cons to ethical investing?

What is classified as an ‘advantage’ or ‘disadvantage’ in this particular case can be subjective, depending on what you as an investor are looking for. Below are some of the typical overall pros and cons of ESG investing.

Examples of the advantages of ethical investing include:

  • Benefitting both emotionally and financially when an company you are invested in performs well, due to all parties shared values
  • Your investments can continue to grow substantially in the future as more people begin to invest in companies with certain value-orientated objectives
  • More investments like yours will continue to encourage other companies to improve their overall ethical practices (to allow them to attract more funding), due to ethical investing currently gaining continued worldwide importance and attention

As well as these listed above, another huge advantage factor in ethical investing is the form of ‘safety-net’ it can provide on your chosen investments, in terms of nasty surprises in the future.

This detailed level of research into exactly what your money is being put towards, can help investors stay out of ‘hot-water’ in the case that something negative is revealed about a company in the future.

Due to both a rise in illegal investment deals, and the world now being clued in environmentally (and watching closer than ever), it will never not be a wise decision to track just exactly what your investment might be funding, if only in the effort to avoid any damaging scandals that arise.

Examples of potential disadvantages of ethical investing:

  • Not providing optimal returns due to the investor choosing to sacrifice certain financial returns for a more ethical approach on their chosen companies
  • Involves heavy amounts of research and screening, to ensure a harmonious balance between both a profitable company choice, and the investors values and beliefs as an individual
  • An inevitable restriction on your choice of companies to invest in

Who can advise me on the correct ESG investments?

The most important factor to remember is that when it comes to any type of investment advice, you should always seek it from a qualified professional.

An Independent Financial Advisor is able to look at your financials as a whole, to allow a thorough assessment of your funds in order to provide you with the correct, tailored advice.

Ethical investing will always be unique to each individual, and will massively vary depending on what exactly that person supports or feels passionate about.

When having an IFA working with only your best interests in mind, it can ultimately eliminate any information that you have learned online that could be incorrect or biased. Many of the directed sites on the subject online can frequently attempt to indirectly influence you to make a decision, knowing it will benefit their site and/or returns.

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We can pair you with the most appropriate advisor based on your needs as an individual, to help you make the correct decisions with your investments, and help you avoid any unexpected, costly errors.

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