Ethical investing: the myths debunked

Ethical investing has been something of a financial hot topic over the past couple of years.

Whilst more people are paying attention to how ethically their money is being invested, there is also a lot of false information doing the rounds regarding where it's being invested and the actual impact that it'll have.

To help cut through the noise about this topic, we've debunked four of the most common misconceptions about ethical investing.

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Myth 1: ethical investing will leave me worse off

The key motivation for investing is obvious – to make as much money as you can from what you already have.

This logically means that the returns are usually the determining factor as to where you will choose to invest your money. 

There is an assumption that whilst ethical investment may benefit a good cause, it comes at the cost of lower returns.

However, recent research by investment platform AJ Bell shows that this is simply not the case.

Seven out of the top 10 ethical funds investigated by the platform produced a better five-year return than their 'non-ethical' equivalent.

Some of the ethical funds have outperformed their equivalent quite significantly, such as the Liontrust Sustainable Future Global Growth, which returned 104.2% over five years – a lot more than the MSCI AC World index return of 86%.

Full results from AJ Bell comparing the returns of the top 10 ethical funds with their non-ethical benchmarks:

Whilst this only takes a small proportion of funds into consideration, it demonstrates that you do not lose out financially by investing ethically. 

Quite the opposite, in fact.

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Myth 2: all ethical funds are the same

With terms such as 'sustainable investing' and 'green investing' often cropping up, it's unsurprising that ethical investment is often associated with tackling climate change.

It's true that investing ethically can be an effective way to help the environment – switching your pension fund, for example, is 27 times more efficient in combatting climate change than not flying, driving less, or giving up meat, according to recent research from Swedish bank J. Safra Sarasin Ltd.

This research doesn't reflect the UK market exactly as it is based on Swedish salaries, taxes, and investing patterns, but it does give a broad indication of the potential impact ethical investment can have. 

But it isn't just for environmentalists.

Good With Money defines ethical investing as 'not investing in companies considered bad; typically tobacco, arms, pornography, gambling and alcohol.'

This suggests that regardless of your values, there is a form of ethical investing that will align with them.

A term often used interchangeably with ethical investing is ESG, or environmental, social and governance investing.

Instead of avoiding companies that are considered to be unethical, ESG funds and companies have an actively positive impact on their staff and the communities affected by their activities and products.

As with ethical investing, this does not have to have be environmental and the companies can be involved in anything from improving community engagement and enhancing data security, to combatting child labour, which are all examples listed by online investing firm Nutmeg.

What each person considers to be ‘ethical’ is also entirely individual, which is why it is so important to make sure that you are completely happy with how your money is being used.

Myth 3: if a fund calls itself 'ethical' then it's a good place to put my money

A company’s use of words such as ‘ethical’, ‘green’, and ‘sustainable’ suggests that an investor’s money would be used in a responsible way that fulfils at least one ESG factor.

There is, however no regulation of these words, meaning that they don’t necessarily mean that the company is behaving in a way that would generally be considered to be ‘ethical’ or ‘sustainable’.

This smokescreen of adjectives contributes to what is often referred to as ‘greenwashing’, whereby companies suggest that their portfolio is a lot more ethical than it really is.

“It can be hard with so much green marketing out there now to really know if something called sustainable actually does what it says on the tin,” says Lisa Stanley, co-founder of personal finance site Good With Money.

Schemes such as the Good Egg try to make it easier to avoid companies that greenwash their portfolios.

Financial services companies can apply to receive a Good Egg badge, which they can then display if it can be proven that they make a genuine positive impact.

Stanley also suggests looking at the MSCI sustainability ratings or Good With Money's Good Investment Review to get an idea of how ethical a fund really is.

Consulting an ethical investment specialist is the most reliable way to know exactly what you are investing in, and you can find an advisor on websites such as unbiased.co.uk.

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Myth 4: ethical investing is time-consuming

Even after eliminating companies that 'greenwash' or just aren't ethical in your eyes, there is still a large amount of choice left as to where to put your money.

Trawling through all of these options individually can seem like a daunting task, but investing in ethical funds is as easy as investing in normal funds, says Stanley.

“Most big investment platforms now list the majority of sustainable funds on the market, whilst some ‘robo’ platforms such as Nutmeg, Wealthify and EQ Investors also offer sustainable, socially responsible, or positive impact portfolios.”

Whilst these platforms can choose the funds for you, reading the small print is key.

“It is important to look at the companies in the underlying funds if you want to make sure you know where your money is really going,” says Stanley.

At the moment there aren’t any ethical comparison sites as such, but the Good With Money directory, the Good Egg mark scheme, and Ethical Consumer list reliable bank and investment provider ratings.

Stanley also recommends Tickr, a relatively new app which allows you to look at company ratings before you make an investment.

The website Fund EcoMarket is another a useful information hub which allows you to search for funds by theme and groups funds with similar ‘ethical’ strategies together.

It is clear that there is a lot of information available to people who want to invest their money in an ethical way.

As it grows in popularity and the relevant resources become more sophisticated, ethical investing has become as easy as regular investing, as well as having the potential to be a better move financially.