Demystifying ethical investment

The financial services sector is full of jargon, and the language around ethical investment can definitely add to the confusion.  To mark Good Money Week 2023, Andy Hockaday, one of our Chartered Financial Planners, shares this thoughts on this problem [that’s not Andy in the picture, by the way 😊].

Getting the fundamentals right

“… well the first thing to say is that the fundamentals of ethical financial advice are not different.  As a financial planner my main role is to help clients understand their circumstances and make better informed financial decisions.  As an ethical financial planner, I’ll also help clients to take their values and principles into account when making these decisions.

As an example of confusing language, the term “ESG” currently gets a lot of attention.  ESG focuses on companies’ management of environmental, social and governance issues – such as pollution, health-and-safety, or corruption.  These are clearly important matters and companies that look after such concerns can, for example, avoid fines from contaminating land; or manage risks such as water shortages; or take advantage of new business opportunities such as clean energy.  These are positive things.

However – in my experience – ESG only scratches the surface when it comes to ethics and values.  Primarily, it’s about business risk and performance, not about rights or wrongs.  You’ll find tobacco, armaments, and fossil-fuel companies that manage their ESG – publishing annual reports about their positive environmental and social impacts, such as protecting biodiversity or providing apprenticeships.  There are also real concerns about ‘green-washing’ – which we’ll look at in an upcoming article – where companies and funds self-proclaiming their ESG credentials actually have a relatively poor performance record on such matters!

Fundamentally, the financial markets are about making money and if you don’t specifically ask about how or what is happening with your investments, then, ethically, pretty-much anything can be included.  If you believe that tobacco products are killing people, or that fossil-fuels are damaging the planet, then do you want to invest your money in them?  The clients we work with are looking for their money not to do harm, and to tackle some of the challenges facing our world.  They want to be more part of the solution, less part the problem.

Of course, many of us still use fossil fuels in our everyday lives, directly or indirectly.  So is it hypocritical to avoid investing in oil companies if we still run a petrol car or have gas-boiler at home; or buy products manufactured in factories using non-renewable electricity?  Yet that is the reality of our lives.  I think what’s important is that – over time – we’re all adapting our lifestyles, taking what steps we can… and changing how you invest your money is a powerful way to change the world.  For example, I read one report from Make My Money Matter – with Aviva and WWF – suggesting that switching your pension to ethical funds can have a much bigger impact on your carbon footprint than moving to a renewable energy provider, adopting a vegan diet, or even swapping air travel for the train.”

Investing with a greater purpose

“At our firm we use the words “ethical investment” to mean investing with a greater purpose.  Other firms might choose to use words such as “responsible” or “sustainable” to mean much the same thing.  “Impact investing” is another current buzz-phrase, focusing on ‘positive change’.  You’ll also hear terms like “screening”, “best-of-class”, and “engagement” – which relate to the particular approaches that fund managers might take when selecting companies to invest in.

It’s no coincidence that the UK’s Financial Conduct Authority (FCA) has been consulting on sustainable investment labels and has proposed new rules to clarify the words that should be used.  The FCA’s Policy Statement is expected later this year.

My advice is to look carefully at the detail behind the words.  With any financial adviser, you’ll want someone who can relate to your personal situation and help you decide what’s best for you.  With an ethical adviser you’re also looking for someone who understands your personal values (and probably shares many of them).  Someone who can help you take your principles into account and can explain how to do so, in detail and in plain English.

Choosing a financial adviser is a big decision.  If you decide you’d like to invest ethically, a good starting point is UKSIF (the UK Sustainable Investment and Finance Association), of which Investing Ethically is a member.  You’ll find a helpful list of advisers on their website.  Most of all, take your time.  Find someone you’re comfortable with, who can answer your questions without too much of the jargon!”

If you’d like to learn more about ethical investment, and how our Financial Planners can help, then please get in touch.