Birmingham Lake

"Wealth is not his that has it, but his that enjoys it"

-Benjamin Franklin

Traveling in the Alps

"Wealth consists not in having great possessions, but in having few wants"

-Epictetus

Traveling in Crete

"Time is the most valuable thing a man can spend"

- Laertius Diogenes

Morris Dancing Birmingham

"The glow of one warm thought is to be worth than money."

-Thomas Jefferson

Alan Moran Independent Financial Adviser Birmingham

"I don't care too much for money for money can't buy me love"

- The Beatles

Traveling in the Red Sea

"Simple, genuine goodness is the best capital to found the business of this life upon. It lasts when fame and money fail, and it is the only riches we can take out this world with us."

-Louisa May Alcott, Little Men

cliffs of dover

"And though I have the gift of prophecy, and understand all mysteries, and all knowledge, and though I have all faith, so that I could remove mountains, and have not charity, I am nothing."

-St. Paul

Finance in the Big City

"Not he who has much is rich but he who gives much"

-Erich Fromm

Birmingham UK Sunset

"Life is what happens to you while you are busy making other plans"

-John Lennon

Travels - A well lived life

"I pity that man who wants a coat so cheap that the man or woman who produces the cloth shall starve in the process"

-Benjamin Harrison

A Guide to Investing Ethically

Ethical-investors

Contents:

  • The History of Ethical Investment
  • What is Ethical Investing
  • Approaches to Ethical Investment
  • Investment Consideration
  • Personal Values and Ethical Investing
  • Ethical Investment Questionnaire
  • Reference Sources – Primary Organisations

PROMOTE JUST, PEACEFUL AND INCLUSIVE SOCIETIES

Reducing violent crime, trafficking, forced labour and child abuse are clear global goals. The promotion of peaceful and inclusive societies, the provision of access to justice for all, and building effective, accountable institutions that will enforce laws and work toward a more peaceful and just society at all levels, are all essential prerequisites for sustainable development.

The History of Ethical Investment

Historically religion has strongly influenced ethical investing. In the 18th century Quakers would not invest in the slave trade. Methodists would not invest in industries that would ‘harm one’s neighbour’ and they supported companies that provided fair employment conditions. Islamic banking shuns investments in alcohol, gambling, pork, and other forbidden items. Over the last 50 years investors have shown an increasing interest in where they invest and today the investment choice for many investors is determined by their social values and beliefs. These beliefs may be environmental, religious, or political, or they may have a desire to do good and make a difference. Friends Provident launched the first ethical fund in the UK, The Stewardship Fund, in 1983 and in the same year EIRIS (Ethical Investment Research and Information Service) was formed as an independent research service for ethical investors. UKSIF was launched in the UK in 1991, an organisation committed to growing sustainable and responsible finance in the UK. It has a vision of a fair, inclusive and sustainable financial system that works for the benefit of society and the environment.

In 2000 it became a legal requirement that occupational pension schemes had to declare
whether they took account of any social, environmental or ethical factors when choosing where to invest. Since then the number of funds investing in ethical stocks has increased considerably, driven by growing public awareness about climate change and an increasing focus on the socially responsible conduct of corporate bodies.

The world is changing: When Limits to Growth came out in 1972 there was shock, disbelief, and denial. Now almost 50 years later it is only the ‘flat earthists’ that are in denial.

According to a YouGov poll published in the FT in May 2018 Millennials are twice as likely as older generations to want their pension to be invested responsibly.

In 2018 there is definite trend to avoid companies with poor social and environmental records, especially following some high-profile scandals in recent years. While the amount invested in ethical funds is still less than 2% of market share, it is steadily increasing, and it is no longer a fringe activity. It is now a significant market sector with the result that ethical companies should be part of all investment portfolios for both ethical and ‘non-ethical’ investors. Watching the development has been inspiring and it is possible that Ethical Investment may become ‘mainstream’ and one of the primary routes to investment within the next few years.

INVESTMENT IN ETHICAL FUNDS IS LESS THAN 2% OF MARKET SHARE, [BUT] IT’S NO LONGER A FRINGE ACTIVITY

What is Ethical Investing

Ethical investing depends on an investor’s views and it refers to the practice of using an investor’s ethical principles as the primary filter for the selection of funds, stocks, and bonds in constructing an investment portfolio. Choosing an investment is based on ethical preferences and is not indicative of the investment’s performance. Sustainable investment and finance incorporates environmental, social and governance factors in financial services decision-making alongside more traditional financial criteria. It may sometimes be described as ‘green’, ‘ethical’, ‘responsible’, ‘sustainable and responsible’ and/or ‘ESG’ (Environmental, Social and Governance). Sin Stocks: It is useful to contrast ethical investments with sin stocks which refer to companies that are either involved in or associated with an activity that is considered to be unethical or immoral. They include activities which exploit human weaknesses and include alcohol, tobacco, gambling, sex-related industries, and weapons manufacturers. They do vary with culture or religion so that for example alcohol may sit on either side. Broadly speaking sin stocks sit on the opposite side of the spectrum from ethical and socially responsible investing, where the goal is to seek out investments that yield an overall benefit for society. While there may be good returns available from sin stocks they are usually shunned by ethical investors who consider where they invest to be more important than the return that they receive.

Approaches to Ethical Investment

There are three main approaches to Ethical Investment: Positive screening, Negative screening, and Engagement. Positive screening’ or ‘support’ involves investing in companies that have a responsible approach to business practices, products or services. A positive investment strategy investigates products and services with environmental and social benefits; and the ways that companies interact with their employees, suppliers and the communities in which they operate.

Positive issues covered by Ethical Screening include:

  • Environmental management and reporting
  • Environmentally beneficial products and services
  • Human rights policies
  • Supply chain and labour standards

Positive issues are used in combination with negative concerns to achieve a balanced approach to screening, particularly in the area of environment and human rights. ‘Negative screening’ or ‘avoidance’ means not investing in companies that do not meet the ethical criteria that the fund sets. This is the oldest and best known approach to responsible investment and it is continually evolving.

Negative issues usually include:

  • Social issues - such as alcohol, tobacco, gambling, and high-interest consumer credit
  • Human rights
  • Environmental impacts
  • Animal welfare
  • Other ethical issues - such as armaments, nuclear power, and genetic modification

‘Engagement’ uses the active influence of shareholders to support and encourage more responsible behaviour by businesses.

Fund managers mainly use dialogue with the management of the companies in which they invest on issues of concern though they may also use their voting powers as well. Engagement strategies are not passive, shareholders use their influence to actively engage with the companies they are invested in, on issues around transparency, sustainability and good governance.

Some ethical investors have viewed engagement as a naïve strategy because they could be overruled at an AGM by others who vote from narrow self interest. However, there is some evidence that given the right circumstances an engagement strategy can produce positive results.

ethical-investment chart

Investment Considerations

We invest to make a return on our money and the same principle applies to ethical investment, the difference is that ethical investors decide that they do not want a return regardless of where it is coming from. If necessary, they are prepared to accept a lower return and put the actual return second to investing in funds where they can make a difference. It is worth noting that recent experience has shown that investors do not always have to sacrifice return and many ethical funds produce a return which at least matches and, in some cases, exceeds the return from ‘non-ethical’ funds. In any case for ethical investors return is more than about financial return and the ‘feel good’ factor is also of value. A good example of the additional value is shown by WHEB using their Impact Calculator which illustrates the effect of their investment on renewables, Carbon Dioxide emissions, water saving, recycling and so on.

Our investment process is underpinned by five key principles:

  1. Capitalism, and Capital Markets, Work – you will obtain a return from the market over the medium to long term
  2. Risk and Return are related – in order to obtain a higher return, you have to be prepared to take a higher risk. If you are not prepared to take a higher risk, you have to accept a lower return
  3. Diversification is your friend – by holding the entire market you minimise the risk of holding each individual stock towards zero
  4. Costs Matter – transaction costs, expenses, and taxes all reduce returns, so we aim for the most cost-efficient route to obtain market returns
  5. Structure Explains Returns – the portfolio structure is vitally important, and it is essential to have the right balance of growth, value, large, and small, holdings to obtain the market return

These principles are explained in detail in our Investment Policy Statement.

When you choose to invest in Ethical Stocks you deviate from these core investment principles in the following way:

  1. When you choose to invest in ethical stocks, funds, or bonds you are restricting your access to the capital markets. Many of the funds that you exclude will produce good returns and you are choosing not to expose yourself to those markets.
  2. The ethical stocks and bonds that you choose will generally be smaller in size and may be higher risk and more volatile. One of our core principles states that risk and return are related so that it is possible that you will obtain a higher return, but you must be satisfied with the higher volatility that such funds could experience.
  3. In limiting your investment choice to ethical funds there will be less diversification in your portfolio.
  4. Smaller stocks may be more expensive to trade which may increase costs.

Investing in single company shares or investing in funds

An investor could choose to invest in one of the many ethical single company shares that are available however, in accordance with our core investment principle regarding diversification we believe that investing in a single company is extremely high risk and not suitable for our clients. In order to achieve sufficient diversification an investor should hold at least 30 stocks and preferably 100 and this would represent a huge amount of management and administration for a small investor. In addition, we believe that most investors do not want to spend time following the markets on a daily basis, reading the company management reports, and managing the administration of buying and selling. The investor would incur a cost in both time and money. Therefore, we believe that most investors prefer to invest in funds instead of single company shares and pay a small charge to a fund manager. Some ethical investors may choose to invest in esoteric company shares merely because of their ethical criteria. These investors may not be concerned about financial return and they may even be prepared to accept a loss. While such ethical principles are to be respected we believe that such shares should not form part of a balanced investment portfolio which has been set up to secure the investor’s financial security. In line with the vast majority of independent financial advisers are we are not authorised to provide advice on single company shares so if an investor wants to invest in single companies, they would have to engage the services of a stock broker or do it themselves.

Personal Values and Ethical Investing

While there is no evidence that ethical investors are on the whole ‘nicer people’ there may be a reason for considering the possibility. Our values exercise has shown that our clients are more likely to share the values of compassion, respect, contribution, honesty, and fairness. It is those values which predispose them to care for the environment and respect for the world in which they live. If the investor’s values include personal power, wealth, victory, self-worth, and revolve around ‘the self’, they are less likely to be so. Ethical Investing and Ethical Lives: When browsing the internet, we found a criticism of an investor investing ethically because they were doing something that the commenter did not approve of in another area of their life. We are all human and none of us are perfect and we suggest that if you live ethically for 90% of the time that is a pretty good achievement. Indeed, we believe that the fact that ethical investors have recognised that they have a choice and they choose to take action makes them inclined to take similar responsibility for other areas of their life and they aim to live more ethically.

Ethical investment is about making a choice and in making that choice a compromise has to be made.

There is no such thing as an absolutely 100% ethical investment because it is bound to be restricted by the physical and human conditions. This does not mean that there is no point in making the decision to invest ethically and being 10% ethical is better than none at all. We all make compromises -- we may be very careful about recycling, but we may not be as careful about what we eat, about how we travel, or in all other aspects of our lives. We are all on a journey and we have to start somewhere.

Mitch Anthony believes that the role of a financial planner is to help clients to use their money to make a life rather than using their lives to make money. Mitch says that people are happier when they achieve the right balance between consumption and contribution. People want to enjoy life, but they need to contribute and feel a sense of purpose, and they are concerned about their legacy. It is these people who are more likely to be concerned about the environment, about climate change, about education, about fairness, and about their legacy. The people who achieve balance and have a sense of purpose are happier and more giving, so that we believe that they are on the whole ‘nicer people’.

Ethical Investment Questionnaire

You can view and download our Ethical Investment Questionnaire here. All clients are asked to complete it. The initial introduction is cautious because our understanding is that The FCA require us to emphasise the potential financial downside of ethical investing. You may find it useful to spend some time with it and work out where you are on the Ethical investment scale. Please feel free to fill in the paper copy and send it back to us using the Freepost address provided.

PEOPLE ARE HAPPIERWHEN THEY ACHIEVE THE RIGHT BALANCE BETWEEN CONSUMPTION AND CONTRIBUTION

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Readers should not rely on, or take any action or steps, based on anything written in this guide without first taking appropriate advice. Interface Financial Planning Ltd cannot be held responsible for any decisions based on the wording in this guide where such advice has not been sought or taken. The information contained in this guide is based on legislation as of the date of preparation and this may be subject to change.