It's all about connecting your personal moral compass with your investment portfolio when it comes to ethical investing. According to the financial services firm Morningstar, sustainable funds including those investing based on environmental, social, and governance (ESG) principles drew €233 billion (£200 billion) in investment in Europe alone last year. In comparison, the figure for 2019 was almost double.
Ethical investment is more accessible than ever thanks to mobile apps and crowdfunded platforms. However, with so many options and varying definitions of sustainability, becoming an ethical or sustainable investor might be intimidating, especially if it's your first time investing.
With this in mind, we'll go through what goes into making ethical investments and why you should consider them.
What is Ethical Investing?
Ethical investing is a method in which an individual makes financial decisions based on his or her own personal ethical code. Ethical investing aims to assist industries that have a good impact, such as sustainable energy, while also generating a profit.
How can I make more ethical investment decisions?
Understanding your values, how you want them to be represented in your investments, and what you want your investment to achieve should be the first step you should take before you think about investing.
You should also prepare to learn the basics and understand the risks that come with ethical investments. For instance, experts advise that you invest for the long term, ideally five to ten years or more, in order to ride out financial market peaks and troughs. How much financial risk you're willing to face and when you want to retire will influence what you invest in and how you invest.
It's also important to remember that the value of your investments can go up as well as down. It's possible that you'll get back less than you put in. This is the nature of investing in general, and it is not unique to ethical investments.
To ensure that your investments are more ethical and socially responsible, follow the checklist below:
- Look into the funds that your pension/Isa/investment provider has to offer;
- Examine your funds' holdings and stewardship/investment policies, as well as those you're considering investing in. These policies outline how your asset manager will invest your money and lobby on your behalf with corporations. You can accomplish this on your own or get this information from your investment (or pension) provider/employer/financial adviser;
- It's crucial to know how your investment provider votes at the AGMs (annual general meetings) of the world's major corporations;
- Use resources from Climetrics, Boring Money, and Good With Money.
Are ethical investments profitable?
While no investment is guaranteed, ethical funds have been demonstrated to perform similarly to standard funds, if not better. In fact, some research suggests that ethical fund performance may be greater. Sustainable funds beat their traditional counterparts in 2019, according to Morningstar data, with 66% closing the year with returns in the top half of their Morningstar categories.
Despite severe interruptions caused by the Coronavirus pandemic, ethical investments are still performing much better in comparison to standard investments according to Morningstar. Their research study found that “In all but one category considered in the study, sustainable funds outperformed, with average excess returns in Q1 2020 ranging between 0.09% and 1.83% across categories”.
Before you proceed to make any type of investment, you should properly analyse any firm or fund you're considering before making an investment. It is entirely possible to invest ethically while also making money. Just make sure you're not neglecting any of the crucial measures that any investor should take before investing.
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