Let’s get ethical

Environmental and socially responsible investment

There are a number of questions that need to be answered before you can make an informed choose about what ethical or socially responsible investment fund (SRI) matches your profile. An ethical or SRI fund is one whereby the choice of investments is influenced by one or more social, environmental or other ethical criteria. The three main ones that are generally talked about are screening, preference (or “best in class”) and engagement.

Screening, probably the best known, is whereby companies are excluded because of their involvement in certain activities, such as, nuclear power, the fur trade and tobacco. This approach also applies where companies are included for positive contributions to society and the environment, including for example, energy efficient technology and organic farming.

There is a variation in how investment policy is developed and adhered. Some have independent ethical committees with an ultimate say on policy changes and company investments and others delegate the responsibility to the fund manager. You may also find that some will use a combination of these two approaches.

A preference or best-in-class approach applies social, environmental and ethical guidelines to select investments. This could mean that a fund manager who has to invest in oil stocks might select the oil company with the best environmental management record.
Engagement does not necessarily exclude, include or prefer companies, however fund managers typically look to encourage companies that adopt social and environmental best practices.

Most ethical investment funds permit you to hold the current £7,200 (2008/09) annual Individual Savings Account (ISA) allowance, in a tax-efficient ethical ISA wrapper. If you don’t want to expose you money to stock markets you could still save ethically and tax-efficiently through a Cash ISA.

Currently there are in the region of almost 100 green and ethical funds available to UK investors, compared with a decade ago when there were just a couple of dozen.

There are also a number of pension companies that offer ethical funds. For the more experienced appropriate investor one consideration is a self-invested personal pension plan (SIPP). These free you to invest your pension in the full range of UK-based investment funds, including almost every ethical fund.

Your investment attitude is crucial, and you need to assess where you fit on the investment risk for reward scale. If you’re a low-risk investor, you may wish to avoid stocks and shares altogether, while if you are at the other end of the scale and have a more aggressive attitude you could consider higher risk companies such as renewable energy start-ups.

Diversification is the key to reducing risk, and not investing all of your money into one fund or sector, but spreading it across different funds, sectors and geographical areas around the world. Ethical funds invest throughout the UK, Europe, the US and Asia, and in sectors such as bonds.