How Ethical is Your Investment Portfolio?
Ethics play an increasingly important part in investment markets.
As investors become more aware of the impact that their investments can have on the world, more of them are turning to socially responsible investment (SRI) methods.
How does SRI work? And how can you check the ethics of your portfolio?
Why Invest Ethically?
SRI is one of the most exciting trends in modern investment, sitting at the intersection between financial well-being and political action.
Investors following this approach avoid potentially harmful industries such as arms, gambling, tobacco, alcohol, and pornography.
Many also seek to make positive investments in companies that support green energy, equality, and other social goals.
This is driven by a recognition that our investments do more than just make money. The companies we support affect the world around us.
More investment in arms manufacturing means more weapons in the world. More investment in green energy means more solar panels.
Our choices become part of the invisible hand shaping society. Twenty years ago, ethical investment was a fringe activity.
Only a few financial institutions such as the Co-operative Group took any interest in SRI. Others saw them as paying for political activism with lower returns.
That’s changing. Academic (https://link.springer.com/article/10.1023/A:1006102802904) studies (https://www.econstor.eu/bitstream/10419/57725/1/702962686.pdf) have shown that ethical investing does not yield noticeably lower returns.
In some instances, it may even lead to better financial results.
If you want your money to do some good as well as turn a profit, then this is the path for you.
Ethical Screening
SRI works through ethical screening. This takes two forms – positive and negative screening.
Negative screening involves assembling a list of bad behaviours an investor wants to avoid.
These can be particular industries, such as arms and pornography, or working practices, such as polluting and providing poor conditions for employees.
A fund using negative screening refuses to invest in companies which score too highly on bad behaviours, or in some cases those that use them at all.
Positive screening involves assembling a list of good behaviours that the fund wants to encourage.
These can be particular industries, such as education and renewable energy, or working practices, such as energy efficient buildings and robust workers’ rights.
There is debate over which approach is most effective in changing how companies behave.
In practice, investors may combine both approaches to help refine their decision-making choices.
So how can you get the information to make those decisions?
How to Check the Ethics of Your Investments
Simply googling the companies you are considering investing in can point you in the right direction regarding making the right decisions.
First, decide on the criteria that matter to you. Then look up the companies that you’re considering investing in.
For positive screening, companies’ own websites are very useful.
Look in the “investors” section of the website, where the company sells itself to potential investors.
Positive ethical policies are a selling point, so if the company has them then it will trumpet them here.
Look for references to environmental issues, workers’ and human rights, and community projects.
The company website can also help with negative screening, as it will detail the company’s activities.
If you don’t want to invest in arms, oil, or mining, then it should quickly become obvious if this is part of the company’s work.
News stories are useful for negative screening.
Big companies in particular draw attention if they cross ethical lines. Look for stories both on news websites and on the pages of campaigning organisations.
Easier Ethical Investment
There are shortcuts you can take.
Funds run by ethically-focused institutions are guaranteed to be built on ethical criteria and to clearly set out what those criteria are, so that you can see how closely they match your priorities.
You lose some agency this way, but you may save yourself a lot of work.
A good compromise solution is to use services that collate information on the ethics of companies.
The Global Reporting Initiative (https://www.globalreporting.org) collects corporate social responsibility reports together in a single place.
While this consists of self-reporting by the companies, it makes comparisons easier.
The Social Funds website’s Corporate Research Centre (http://www.socialfunds.com/csr/index.cgi) provides links to reports by third parties, giving you a more balanced view, again gathered on one convenient site.
And organisations such as Ethical Investment Research Services (EIRIS) (http://www.vigeo-eiris.com) provide investment analysis tailored toward ethical investors, with indices measuring the ethical performance of companies and funds.
With their help, you can make informed decisions based on a range of criteria.
Ultimately, as with so much in investment, success in ethical investing comes down to getting the right information or asking the right advisor.
While the criteria for ethical investing are a little different, the processes are mostly the same, and the returns can be just as good, if not better.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
