19 Jan, 2014 @ 10:30
2 mins read

Richard Alexander: A question of ethics

tax break

WITH Christmas over, perhaps your thoughts are turning to resolutions for the new year and maybe you are one of the growing number of people who are concerned about what the money they have invested is actually being used for.

This is where the use of ethical funds may be appropriate to consider. There are in fact many collective investment funds that describe themselves as being ethical, but that does not mean of course ,that the fund will meet your own ethical standards and come to that, not all funds will employ the same principles.

While there is no common standard, the methods employed by fund managers will have a similar approach and will use a method of screening.

There are two possibilities here for either Negative or Positive screening.

For example, if you wanted to avoid companies investing in arms manufacture, tobacco production or nuclear energy, these can be “screened out” from the investments and this is the process of negative screening.

Conversely, you might be seeking to support a company that is involved with projects that have positive social or environmental impact, such as renewable energy sources or waste management – this is known as positive screening.

However, one problem that can arise is that you could be limiting the ability of your investments to perform if you place too many restrictions on them. Where this may be the case, you can employ a “best-of-sector” approach. As an example, an ethical fund might want to invest in the oil & gas sector but will only invest in those oil companies that are “best in their sector” where perhaps those companies have a better environmental or Human Rights track record.

Another approach could be one of activism whereby an attempt is made to influence corporate behaviour. This might be encouraging a company to reduce carbon emissions or even to improve conditions for workers in their supply chain.

With ethical investing, as with all types of medium to long term investment planning, there are several layers that need to be considered if the return on investments is going to achieve its objectives.

This not only requires careful fund selection, but also requires the right mix of asset classes, known commonly as “asset allocation”, to ensure an appropriate spread of investment risk.

For some people, who have both the time and the dedication to conduct sufficient research and monitor performance, this can be a rewarding way to invest, not only in terms of the growth that can be achieved, but also the satisfaction of knowing that you have upheld your personal views in terms of your social conscience.

For the majority however, this can be a daunting task. While there are an increasing number of ethical funds available, this extra choice in many ways makes the job even more difficult. Fortunately there are specialists who understand ethical concerns and who have the solutions available, so if this is an area that concerns you and is on your new year’s resolution list, there is help available.

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