How Ethics are Affecting Investment

From pension funds to high street banking, social responsibility is shaping our investment world - and your portfolio

Emma Wall 18 October, 2013 | 10:44AM
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Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.

Pension schemes are waking up to the investment opportunities to be found in long term sustainable stocks. Pension provider AllianceBernstein has even launched a range of ethical pension funds.

AllianceBernstein managing director, client relations Tim Banks says the additional employees saving into pension schemes through auto-enrolment will include those who want their ethical beliefs reflected in their retirement savings.

“We need to ensure that pension savers who have an ethical belief have this taken into account in an investment strategy that meets the retirement needs of a modern workplace environment,” he said.

Specialist investment firm EIRIS advises many large pension funds on the importance of sustainable, socially and environmentally responsible choices - and how they can increase profit and income for scheme members.

It says that since the credit crisis, and the more universally accepted knowledge of climate change, institutions are cottoning on to ethical investment.

In fact, ethical investing is so popular there is even a series of indices called FTSE4GOOD that investors can use to peruse companies' green credentials.

"Many investors are interested in the concept on investing ethically. However, the over-riding objectives for most investors are maximising returns and managing risk and both of these are more difficult to achieve if investing ethically," said Patrick Connolly of stockbrokers AWD Chase de Vere. 

It is therefore important that investors opt for a highly rated fund when determining their selection. If it is more specialist ecological exposure you are after, Connolly urges investors to stick to a composite fund such as an OEIC or investment trust.

"If people have strong beliefs which they want to replicate through their investments then the easiest way to do this may be through buying individual company shares," he said. "However, buying individual shares rather than collective funds will lead to the investor taking greater risks."

As some ethical funds screen out major components of the stock market - such as mining and energy companies - it important to recognise there may be periods when these funds underperform. To ensure that your entire portfolio does not suffer in these circumstances, the golden rule of investment still applies - diversify, diversify, diversify.

"The most important advice is to do your research and choose a fund that is both diversified and fits your own investment priorities. However, you need to appreciate that the policy of 'exclusion' in your investment strategy will increase risk," said Garry White of stockbrokers Charles Stanley.

Socially responsible investment funds can play an important role here, as they invest across all sectors, choosing those stocks that exercise best practise, and including companies from energy, telecoms, pharmaceuticals sectors that pay healthy dividends. 

Even taking SRI funds into consideration, a purely ethical portfolio will be almost entirely equities - and skewed towards small and mid cap stocks at that. This can increase volatility, so it is important that investors allocate some of their portfolio towards cash and bonds. Ethical banking can ensure that the cash allocation at least is in keeping with the stance of the equity selection.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar