Is now the time to consider ethical investing for you investments?
Ethical investing is not the latest investment fad and has in fact been around for a long time, going as far back as the 18th Century. Despite its long history, for many clients it has been low on their agenda due in part to a number of misconceptions.
What do you need to know about ethical investing?
The perception is that performance is lower
Investors think: Investors tend to believe that performance is lower as there is less choice available.
There have been many academic studies that show that there is no evidence that an ethical portfolio should necessarily under-perform, and there are several reasons why this may not be the case. The reasons are as follows.
- 90% of investment performance is determined by your asset allocation.
- Ethical investments will typically exclude sectors such as oil and gas etc. which are typically follow the economic cycle with a lag.
- Companies operating in an ethical way could arguably have an improved outlook given the direction of regulatory change and consumer behaviour.
- Investing in companies which consider the impact on society may actually improve their long-term performance, as their products and services may command a premium.
The Perception is that it is more risky
Investors think: Investors often think that ethical investments are more exposed to Government subsidy risk or are less diversified and are at greater risk than mainstream shares.
Ethical investments are often well diversified, plus the fact that the impact on stakeholders over the long term, may actually lead to the companies choosing less risky business activities.
Political risk is no longer a relevant as it has been, as most products have become mass produced and the benefits of economies of scale has removed the need for subsidies.
Moreover, investing in companies which consider their social impact may actually be less risky in the long term. We only need to look at the automotive sector to see how legislation is affecting the traditional companies.
The perception is that it is too expensive
Investors think: Investors often believe that ethical funds are more expensive compared to mainstream investments.
Compared to a traditional investment portfolio, ethical portfolios fund management fees are typically no less or more expensive.
Fund management fees are somewhat easier to compare as many investors hold their investments on platforms, where it is easy to compare costs.
The Perception is that it makes little difference
Investors think: Ethical investing historically has been about avoiding companies that were considered to be operating is a socially unacceptable way, such as those involved in weapons supply or tobacco and the oil industry all of which it could be argued have a negative environment affect.
Increased shareholder power engaging directly with company management have the potential to make companies consider their impact they have on society as a whole and are encouraging more positive change.
Whilst this is great news for society, companies do not make these changes solely on the basis of shareholder pressure. A business that considers its social impact is more likely to reduce its potential for legal and regulatory costs, not to mention it will almost certainly improve a company’s public brand.
The Perception is that it is a niche market
In the UK, there is over £100 billion invested in ethical investments across more than 190 funds according to research carried out by Good With Money and 3D Investing in 2017.
Consumer demand is increasing exponentially as consumers become more aware that they can invest in ethical investments and still make profits. We expect ethical investing to continue to increase.
Ethical investing is a growing market and is continuing to see more and more investors wanting their money invested in this way.
Are you concerned about how your investment and pension portfolio is invested? Contact us to today. We can review your current situation and let you know what options are available to you.
If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
Email us at email@example.com
It is advisable to take advice from a professional financial adviser when making major financial planning decisions.
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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.