How to invest ethically

It is important to know that ethical investing is widely viewed as imperfect. But if it is an area that interests your clients, we show you what to look out for.

1. Decide your own ethical priorities. It could be beneficial to assess whether the categories of ethical investing match with your clients’ personal values to a greater extent than traditional investing. If good employment practices are more important than not investing in alcohol, then more traditional funds could be more appropriate than investment companies that negatively screen for alcohol holdings.

2. Don’t forego returns. According to the Investment Management Association, only 1.2 per cent of investors’ savings is in ethical funds. This is largely because of a perception that returns on them are less impressive, which means investors must be especially judicious in hunting profits in a limited universe of funds.

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3. Consider a themed approach. Sustainability themed funds select leaders in industries like transport, waste management and health. There are funds that specifically focus on the environment, or on single issues such as climate change, or a single resource such as water.

4. Positive or negative screening? Different fund managers have different tactics in selecting ethical funds. Negative screening will filter out firms dealing in areas such as alcohol, arms and tobacco, while positive screening will look for companies that perform along specific ethical guidelines.

5. Understand the limits of ethical investing. Disclosure is a particular problem in this kind of investing, and few companies list all holdings. Be prepared to not know everything about where your ethically-invested money is going.

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