Ethical investment – what does it mean today?

June 7, 2021

As society’s focus on sustainability grows ever stronger, so too does investors’ desire to be more environmentally principled about where they put their money. But what does ethical investment entail and what steps exist to help investors go down the route? Here, Ian Wilkinson, Perspective (North East) Ltd managing director, explains more.

Like many financial ideas, investing ‘ethically’ can quickly become overly complicated by industry language.

It is not always well understood; investors may want their money to do good, or at least do no harm, but it is not always clear how to get started.

When we talk about ethical investing, what we really mean is putting your money into investments that are responsible and sustainable.

Ethical investing originally meant using ‘sin screens’ to weed out potential investments in industries clients wanted to avoid.

This is what is known as negative screening, preventing investment in industries such as alcohol, tobacco, gambling and armaments, and enabling funds to be selected that exclude certain industries.

Today, however, there are ways to invest positively and proactively.

Positive action

Negative screening still plays an important role.

However, investors and providers can now adopt a more proactive style, finding companies that work hard to manage their impact and legacy on the world.

This positive screening considers numerous environmental, social and governance (ESG) elements for investment.

ESG: The key questions

ESG draws a number of questions that investors will need to ask before making any decisions on their finances.

They include:

Environmental factors – How does an organisation approach climate change, energy and water usage, resource management, waste disposal, the ecological impact of their products and their carbon footprint?

Social factors – Is a company attuned to social
diversity, human rights and consumer protection, and does it work to promote a healthier and higher quality of life for staff and stakeholders? Furthermore, does the business behave in a responsible way and expect the same of their suppliers?

Governance factors – How does a company build and review its management structure? How does it approach employee and investor relations? Are there sufficient levels of transparency, honesty and integrity at board level, and is this ethos shared across the company?

Action for the future

The above are all questions that modern, socially aware investors are keen to engage with.

By making positive screening part of the investment process, providers can find funds that include companies setting a positive example through environmentally-friendly products, socially-responsible business practices and strong corporate governance infrastructures.

Positive screening is not just about recognising what is being done by businesses today, though.

It is about encouraging them to keep ESG considerations at the forefront of what they do today and striving to achieve ever-higher ESG standards going forward.

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