It’s become more common to incorporate ethical values into investing in some way. Whether you’re investing through a pension or building a separate portfolio, it may be something that’s appealing to you. One of the most common concerns is that it’ll mean returns are lower. But this isn’t always the case.

According to research from Triodos Bank:

  • 66% of UK investors would like to support companies that contribute positively to society and the environment. The figure has increased by 11% in the last year
  • 53% of people believe carefully choosing where you invest your money is one of the best ways to protect the planet

There may be a range of values you want to incorporate into an investment strategy. This could range from avoiding companies with interests in fossil fuels to investing in those with a positive human rights policy. It’s clear that more people have an interest in ethical investing. But what does it mean for returns?

Ethical investing and returns

It’s often thought that ethical investing means sacrificing returns. Yet, statistics indicate this isn’t always the case.

Between 2008 and 2018:

  • The UK FTSE4Good UK Index beat the FTSE All Share Index, returning 107.23% compared to 105.5%
  • In the US the gap was even bigger. The FTSE4Good US Index delivered returns of 204.24%. This compares to 162.92% for the S&P 500

Recent figures from the National Employment Savings Trust (Nest) highlight this too. Nest boasts more than 8.5 million members and is Britain’s largest auto-enrolment pension scheme.

Assuming an employee on a full-time income of £29,588 joined the scheme in October 2012 and made minimum contributions:

  • They would have a pension worth just under £6,000 as of September 2019 thanks to employer contributions, tax relief and investment returns using the default fund
  • Those choosing the ‘higher risk’ fund would have done a little better at £6,241
  • But it’s the ethical fund that comes out top with £6,258

Whilst the statistics are positive, it’s important to keep in mind there are no guarantees when investing and past performance is not a guide to future performance.

The challenges of ethical investing

The above statistics don’t mean you should jump into ethical investing though.

First, it’s important to be aware that all investments carry some risk. The value of an investment can fluctuate, and investing isn’t always the most appropriate option for your circumstances.

Second, ethical investing can come with extra challenges, including:

1. Reducing your investment opportunities: If you choose to avoid companies because they don’t align with your values, you’re reducing the portion of the market you can invest in. The impact this will have will depend on a range of factors, including which potential sectors you’re excluding. There are other investment strategies you could use that don’t mean cutting out companies.

2. Values are subjective: Ask people what their top priorities are when investing ethically and you could end up with very different responses. Values are highly subjective. This can be an issue if you’re investing through an ‘ethical’ fund. Despite the name, you may find it doesn’t match your goals and concerns.

3. It requires more due diligence: If you’re going to make investment decisions based on values, you’re likely to need to delve deeper into companies. If you’re selecting investments yourself, this can be time-consuming and complex. Alternatively, if you’re using funds this may mean fees are higher.

Keep the basics of investing in mind

If you decide ethical investing is the option for you, the basics of investing still apply. When selecting investments that align with your values remember:

  • Ensure your portfolio is balanced: Even if values are your focus, you need to ensure your portfolio is well diversified. This means investing in a range of sectors, geographical locations and products. This can help to protect your portfolio when troughs are experienced in certain areas.
  • Look at the long-term picture: Volatility should be expected in all investment portfolios. The markets will rise and fall, affecting the value of your portfolio. It’s important to look at the bigger picture by focussing on long-term trends. Typically, investment markets outperform over the long term. As a result, you shouldn’t invest with a timeframe of fewer than five years in mind.
  • Choose the right level of risk for you: As with traditional investment strategies, risk profiles play an important role when investing ethically. Your risk profile should be based on your current situation and goals. Usually, higher-risk investments will come with higher potential returns but there’s a greater risk that you could lose your money.

If you’d like to review your investments, whether ethical or not, please contact us. We’re here to help you choose investments that you’re comfortable with and align with your aspirations.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.