Ethical investing, also known as socially responsible investing or green investment, is an investment strategy which seeks to consider both financial return and social good.
Socially responsible investors help to encourage corporations to promote environmental stewardship, human rights and diversity.
Ethical funds tend to exclude sectors such as armaments, gambling, tobacco, alcohol and fossil fuel companies.
With regards to ethical funds, managers use a process of screening to ensure as far as possible that investors achieve their aims.
For example some investors may want to invest ethically but don’t want to take too much risk, and I would suggest they may be attracted to light green investments. These funds tend to be well diversified and in my opinion are generally invested into large companies which are less volatile and therefore less risky.
I often think of light green funds being avoiders of some sectors rather than being particularly proactive in areas for good such as renewable energy. This space is taken up by dark green funds which apply a very strict criteria, and they will only invest in companies which actively seek to improve our environment or benefit the community.
So these funds will include companies which are involved in public transport, wind and wave energy, waste management and green technology. Dark green funds tend to have less companies they can invest in to because of their strict criteria, and also because often they are investing in relatively new industries. These companies tend to be smaller and less well capitalised leading to greater risk.
However, the restrictions placed on ethical funds does not mean they make for poor investments.
Indeed with recent issues in traditional industries such as the oil and car industry, coupled with governments supporting green energy it has given the sector a shot in the arm.
It could be argued that for some investment in green portfolios is no longer driven by ethical concerns, but is motivated by purely commercial principles of delivering better returns than conventional portfolios.
But as always before committing to any type of investment it is worth consulting an IFA to ensure you have the right strategy in place and are aware of all the risks.