When you invest, you should choose investments that are suitable for your circumstances, goals and attitude to risk. For some people, it's also important to make sure an investment is compatible with their social or ethical concerns.
The terms "ethical investment", "environmentally responsible investment" and "socially responsible investment" (SRI) are used to describe this type of investment strategy. It's possible to invest directly in companies whose ethical and social responsibility profile you agree with through shares or corporate bonds, or you can invest in specially designed investment funds which follow a particular ethical theme.
The Ethical Investment Research Service (EIRIS) defines an ethical fund as “any fund which decides that shares are acceptable, or not, according to positive or negative ethical criteria (including environmental criteria).” The different ways of choosing an ethical investment are outlined below:
Funds that use negative screening, often referred to as dark green funds, exclude companies that are involved in activities that the fund manager regards as unethical. Each fund will have a different definition of what constitutes "unethical", but this could include avoiding investing in companies that profit from gambling, tobacco, alcohol and arms manufacture. negative screening funds may also avoid investing companies that contribute to pollution of the environment, bank lending to corrupt regimes or even testing of products on animals.
Positive screening funds use positive criteria to select suitable companies. Funds that take this approach look for companies that take an active role in promoting what the fund perceives as ethical, socially or environmentally responsible products or services. This could include investing in companies promoting recycling, alternative energy sources or water purification.
Shareholder activism and best in class
Shareholder activism involves a fund manager or direct investor "engaging" with a company they are invested in. The aim is to encourage socially, environmentally or ethically minded behaviour through meetings with senior managers or voting at annual general meetings.
The best-in-class approach to ethical investment allows for investing in companies from any sector, but will focus on companies that follow most closely a set of ethical, socially responsible or environmental guidelines in the process.
Diversification and risk
It's important that your investment portfolio is well balanced, so you may want to avoid investing too heavily in any one industry or sector.
For more information on getting started investing, read out guide: investing for beginners
Ethical investments will vary in terms of their risk profile, so you should research your options carefully before you invest, and make sure your investments are suited to your attitude to investment risk.
The value of your investment can go down as well as up and you may not get back all that you put in.
For advice on investing ethically, speak to a financial adviser, who can help develop a investment strategy that suits your goals.
Last updated: 03 June 2015