Will it cost me to invest ethically?

Butterfly sitting on a leaf of a blackberry bush surrounded by ripe fruit

Will it cost me to invest ethically? This is a question I have often been asked over the years.  Particularly during what we might call the Covid era, many of us have become a little less selfish and a bit more concerned with, and thankful for, others.

We have perhaps been more concerned for our loved ones and wanted to be in touch (via Zoom etc) more often.

We have frequently expressed to our friends and colleagues that ‘we trust they are well’. We have expressed positive thanks to the NHS and other key workers either personally, or by hand clapping, or on social media.

Possibly we have become more aware that if we want to live happy and prosperous lives we need to widen our vision. A fulfilling life cannot just be about us and our loved ones. It needs to include all sorts of people around us and even those in other countries we will never meet.

Our affect on the world

As part of an expanded view of what is really good for our wellbeing, fulfilment and general prosperity we should include the way we invest. It is good to think about the effect we have in this world when we do things and that applies equally to our use of money.

You may feel that your investments have nothing to do with anyone else but that is not true. For example, by depositing money in a bank you are enabling someone else to borrow that money perhaps to purchase a home. That is the essence of proper banking although many banks did stray away from that and got involved in dubious leveraging of deposits prior to the ‘credit crunch’ of 2008, with disastrous results.

On the other hand if you invest in shares you are helping that company or those companies to employ people, so that they too can enjoy a form of prosperity.

Whether we like it or not our money will affect others and we should acknowledge that real people will be affected by our decisions in this respect. This applies both to what we spend our money on and what we invest our money in.

 

Ethical investments are growing in popularity

Ethical investments are growing in popularity as people realise that they don’t want to invest in companies that exploit their workers; produce unhealthy products such a cigarettes; manufacture armaments; pollute the environment; or are involved in various types of pornography.

On the other hand they would like to invest in companies that are having a positive impact on the world by producing alternative forms of clean energy; improving people’s lives in the third world; or benefiting the environment.

Will it cost me to invest ethically?

But we come back to the question Will it cost me to invest ethically? The truthful answer is that you need to be prepared for the fact that it could because:

  1. By screening out companies that do not meet a particular set of ethical criteria you will miss out on the returns they provide which may be in excess of the returns from the companies you are left with

 

  1. Ethical companies tend to be smaller simply because it is more difficult for very large companies to run every aspect of their business in an ethical way. Smaller companies will underperform during difficult economic conditions as investors rush for the comparative safety of large well known companies.

 

  1. Companies in emerging markets are very much less likely to meet ethical criteria and these are the very economies that can produce the greatest growth in a portfolio over the long term.

 

So if you decide to invest ethically you must be prepared to pay a premium in terms of lower returns from your investments. On the other hand if you are investing for the long term it surely must make financial sense to invest in companies that have strong Environmental, Social, and Corporate Governance (ESG). In the modern world these are the companies most likely to survive and prosper. 

How have ethical investments performed over the Covid era?

Before saying a bit more about ESG let me refer you to the following table which compares the performance of one of the best providers of ethical portfolios, Tatton, with its non-ethical peers over the Covid-impacted 12 months to 31 July 2020.

All returns are calculated in £-Sterling and are shown after Tatton’s discretionary fund management fee and fund charges, but before all other fees, such as platform and adviser charges.

Not only did all of the Tatton ethical portfolios outperform their non-ethical peers during this period (apart from the month of July in two cases) but they produced positive (or in two cases non-negative) returns over the four time periods. This was no mean feat given the dramatic stockmarket falls in March of this year.

What are Environmental, Social and Governance (ESG) criteria?

ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies.

Putting it another way ESG is a set of standards for a company’s operations. The hallmarks if you like of a well run company. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

I hope that this has at least made you think about whether you should invest ethically.

You can read more about ethical investing on ethical investing

 

Arthur Childs

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