Charitable donations aren’t the only way we can use our finances to change the world – how we spend our money has an impact on the world around us. When we spend money, certain businesses or individuals have greater funds at their disposal. The same goes when we invest it.
You might think that ethical investing would mean sacrificing returns. Think again… The FTSE4Good Index, which includes only socially responsible businesses, is incredibly profitable.
In fact, if you invested £1,000 in the FTSE4Good at the start of 2014, you’d have made £1,133 as of the start of 2019. This compares to £1,035 on the FTSE All Share, which tracks the entire market. If you chose to invest your £1,000 on ‘The Vice Fund’ – of tobacco, booze, gun and gambling companies – you’d have lost £138 over the five years. Being good seems to finally be paying off when it comes to investing.
Of course, it’s impossible to say for certain whether ethical stocks will continue to outperform their sinful counterparts in the future. Past performance is never a true indication of future success when it comes to investments.
In the past, so-called sin stocks used to be a profitable investment. The thing is that such companies are somewhat more ‘recession proof’ than conventional companies. People tend to continue drinking and smoking a similar amount during tough economic periods and cut back elsewhere.
If you invested in The Vice Fund between 2002 and 2007, you’d have doubled your money, but something seems to have changed. The stats show that investing ethically is now more profitable.
And this increased profitability of socially responsible and green businesses couldn’t have come at a more crucial time for the planet. In October last year, the UN’s Intergovernmental Panel on Climate Change said we only have 12 years left to bring global warming under control and avoid a climate catastrophe that could risk life on Earth as we know it.
How can I get started with ethical investing?
Well, there are two main types of ethical investing strategy: ESG (environmental, social and governmental) and SRI (socially responsible investing).
With ESG, the environmental, social and governance practices of an investment that may have a material impact on the fund are taken into account. While there may be a focus on social consciousness, financial performance remains the primary factor.
SRI takes things a step further. Investments are eliminated or selected according to specific ethical criteria. For example, an investor may choose to avoid a mutual fund that invests in gambling companies because they hold beliefs against gambling.
Investing in funds that target your own ethical criteria isn’t easy. Ethical funds don’t share the same definition of ethical, so it might be worth seeking financial advice to make sure your hard earned investments change the world in the way you want.