Tim from Ethical.Money talks why, and how.
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Tim, tell us briefly how you came to be interested in ethical money and finance…
To keep up to date with developments in financial services I attend regular training seminars and, due to the increasing interest, developments and growth in the ethical investing sector, it came up at a training event. Being an environmentally conscious person, what I learnt sounded fantastic and I had to learn more. The more I learnt, the more I liked!
What’s the definition/s of ethical you use, as a financial advisor?
As a financial adviser, being ethical means providing appropriate advice in the best interest of my clients, avoiding conflicts of interest, keeping fees fair and competitive and regular reviews to make sure the clients objectives are being met. When it comes to what makes investments ethical, the definition ranges from companies working towards improving standards and being more sustainable to companies developing new products and technologies to solve social and environmental issues.
How do ethical investments compare against non ethical?
Modern investing involves selecting suitable ‘funds’ for clients instead of selecting individual companies (although this is still possible for some). These funds are created and managed by ‘fund managers’ and include a wide range of companies and investments to make a diverse ‘off-the-shelf’ package for clients. There are several ways to compare ethical and ‘non-ethical’ funds. We can compare the performance, the volatility and what makes up the underlying investments. There are 3 common methods used to create an ethical fund. ESG (environmental, social, governance), SRI (sustainable, responsible investing) and Impact investing. ESG funds have recently shown better performance than non-ethical, they have the capacity to be less volatile and the underlying companies are existing business working towards becoming more sustainable and improving management practises. SRIfunds have also in some cases shown better performance or at least comparable performance, however volatility can be higher. The underlying companies are usually chosen by a blanket exclusion of certain sectors eg. fossil fuel, weapons etc. (whereas ESG will allow some sectors if companies are changing for the better). Impact funds tend to have mixed performance because the companies are involved in finding solutions to global issues and they tend to be younger companies operating in a smaller market. It’s also worth noting that ethical fund management charges are also comparable and competitive across the board compared to ‘non-ethical’.
Is it more than a trend now, that we’re seeing?
It’s aways been more than a trend for conscientious investors and what we are seeing is a growth in the number of conscientious investors thanks to increased awareness of global issues. Additionally, there is pressure from governments to incorporate ethical considerations into the investment process and advisers will be required to consider clients ethical views when providing advice. It is therefore, most definitely more than a trend.
As more people, and institutional investors, divest from less ethical stocks, will this cause the price of those stocks to fall?
I would expect that to be the case if enough people/institutions/funds divest. Stocks rise in price due to demand. Less demand would likely see a drop in price.
Tell us something we don’t know….!
ESG funds ‘screen out’ companies that score badly on environmental, social and governance factors. Environmental is obvious with pollution, use of resources etc. Social refers to the impact on staff and the wider community so companies that exploit 3rd world labour are excluded. Governance is all about how well a company is run. Quality and transparency of management, accounting practices etc. These are factors that can lead to negative investor sentiment and volatility like the Volkswagen emissions scandal, Apple’s use of 3rd world labour and Facebook’s data management practices. Funds have therefore been able to exclude these gargantuan organisations, avoid the negative sentiment and actually produce stronger returns as a consequence.
Thanks Tim, keep up the great work, to be continued … Bird
Contact Tim at www.Ethical.Money
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