The 5 Minute Guide to ethical investment

The Momentum UK Team 15 January 2014

If you’re thinking of investing, but don’t like the idea of putting your money into companies or industries you believe to be unethical, you may want to consider an ethical investment fund. This 5 Minute Guide will tell you some of the things you might like to consider before you need get started.

What are ethical investments?

Ethical investment funds have been around since the 1980s - the first UK ethical fund was set up by Friends Provident in 1984. The Ethical Investment Research Service (EIRIS) estimates that there is currently around £11.3 billion invested in close to 100 ethical funds. Like in a conventional investment fund, your money is pooled with that of other investors for a stake in a ready made portfolio. Ethical funds are different in that they only invest in companies who meet their ethical criteria.

You can of course choose other strategies such as investing directly in a company that you consider adheres to your ethical principles, but investment funds are a popular way to invest ethically.

Who decides what is “ethical”?

Different funds will have different ethical criteria - just like individuals. You’ll need to research different funds to find one with ethical aims that you are happy with. For example, you might want to invest only in renewable energy, or avoid companies that work in the arms trade. Most funds use one of two types of screening process to decide which companies to invest in:

  • Negative screening: a fund decides what it will not invest in. For example, some funds may not invest in any companies associated with tobacco, the arms trade or who do business with oppressive regimes. These are often referred to as “dark green” funds
  • Positive screening: this is when a fund invests only in companies they believe to be taking positive social, environmental or ethical steps. For example, a fund may only invest in companies meeting certain renewable energy targets, or committing to progressive working practices. These funds can be referred to as “light green” funds

Choosing an ethical fund

As with any investment, it is important to consider a number of factors including your financial circumstances, attitude to risk, and how long you can afford to commit your money for. Take a look at our guide to Investing for Beginners for more information on what to consider before you invest for the first time.

If you have decided that investing in an ethical fund is right for you, make sure you research funds thoroughly to find one that meets your ethical criteria as well as your investment goals. To help you with this process, the EIRIS - a not-for-profit, independent service - carries out research on the ethical performance of different companies. On their website you can look at a range of different funds to find the right one for you.

How to invest

Like any investment fund, you can usually invest through an ethical fund either directly or through a wrapper such as a pension, ISA or Sipp. You can do this through an independent financial adviser, or on your own through a fund platform.

It’s not just investments - there is now the option to ethically purchase a range of financial products, from bank accounts to credit cards and mortgages. So if you’re concerned about the impact your money has on the world, why not shop around and see if you can get a good deal on an ethical product?

Remember that any investment involves a level of risk, and you could lose some or all of what you put in. If you are unsure about any aspect of the investment process, you may want to speak to an independent financial adviser.