The Ethical Investment Fund Explained
An ethical investment fund is an investment strategy in which investors of a firm’s ethical values (social-cultural, moral and also religious) are the main objective, together with excellent returns. Investors are also supposed to prioritise ecological, social, and governance (the ESGs) concerns in their investment choices.
With the number of suspicious and illegitimate investment products shooting up, most investors are starting to ensure that firms make social-conscious investments. It can mean treating staff members with respect, producing healthy products, offer consumer-conscious services, and abstaining from disreputable business practices.
How Do Ethical Investment Funds Work?
Have you ever wondered how Ethical Investment Funds work?
There are a variety of responsible investment decisions you can make, and the approach that ethical investment funds take is based on the investment criteria and the ultimate goals. The three main strategies include:
The engagement investment strategy involves tactically engaging with firms and organisation to endorse socially responsible corporate practices. It could include practices like a diversifying the firm’s board of directions, or being at the forefront of the ‘green world movement’ through their carbon emission targets.
The exclusive tactic strategically avoids investing cash in firms and organisations that don’t meet specific criteria or that participate in activities like the production of heavily ‘frowned upon’ products like oil, tobacco, and firearms.
In this investment strategy, particular sectors aren’t excluded. Instead, the finance manager evaluates every industry and look for the best-in-class firms to invest in, based on their ‘socially responsible ‘criteria.
At times, a money manager will implement one of these strategies, and at times a mixture of the three will be employed. Ethical investment funds can also be categorised by how stringent their principles are. For instance, an ethical investment fund that features strict exclusions in place is known as featuring a ‘dark green’ ethical strategy. In contrast, the funds that pay attention to the engagement investment approach are referred to as ‘light green.’
The Types Of Ethical Investment Funds
Responsible investments are today, becoming trendy, and there is a myriad of ethical investments to choose from. Some of these include:
Environmental, Social and Governance Funds (ESGs)
These investment products consider how the environment, social and governance risks and prospects will have an impact on the firm’s performance. Here, an ethical firm will invest sustainably while also maintaining the same level of proceeds as they would with a basic strategy.
Socially Responsible Investing Funds (SRI)
The SRI funds don’t invest in controversial firms or industries like firearm manufacturing, oil companies, gambling dens, tobacco and alcohol production. In these investment funds, the investor’s moral value is essential than the financial returns, unlike with the ESG funds.
These place equal significance on the fund’s performance. Therefore, they actively consider establishing ethical changes with a company’s products and services. Impact funds are ideal for those investors who are socially-conscious but also want excellent returns.
These investment funds only focus on stocks that heed to religious values and don’t include investment opportunities that don’t fit in the category.
Others come in the shape of ISAs, or pension funds – what they invest in is what makes the difference. Some ethical investment funds will not include producers and firms that sell meat, seafood, poultry, and dairy, thus making them an ideal fit for the vegan community. Other funds exclude firms that engage or haven’t made a stand against human rights abuses.
It is good to know that,
If you have specific investment considerations, then it’s best if you considered perusing through a funds’ factsheets since that will offer a deep-dive into what you’re prescribing to. It will also let you know if you’re ethically making the right investment decision. You can also consult the fund administrator for more information.
Advantages of Ethical Investment Funds
Ethical investment schemes offer a variety of perks which include, but aren’t limited to:
- As an investor, you feel comfortable investing in a firm that supports your values. You benefit not only emotionally but also financially if the values also match their dedication to making money
- As more people invest in a specific ethical investment fund, the investments triple and that guarantees you a substantial amount in the future
- Since ethical investment funds are gaining popularity, it’ll offer other companies the opportunity to improve their ethics to attract investors
Disadvantages of Ethical Investment Funds
Like all other financial investments, ethical investment funds have some drawbacks, which include:
- Since ethical investing isn’t a passive approach, it involves a lot of commitment and work. You have to research and conduct due diligence to make sure that the firms’ beliefs and practices align with your values
- Ethical investment funds don’t necessarily offer you optimal returns. Thus, you can be sacrificing financial profits for the ethical strategy
- The charges for ethical investing can be ridiculously high because of the amount of research involved with determining the ideal investment
Where To Invest An Ethical Investment Fund
With ethical investing becoming a market favourite, today, most of the prominent investment firms provide an ethically-dedicated fund. For instance, PensionBee, one of the most popular pension plans investment firm offers two ethical investment funds that are designed to cater to the needs of those who want to invest their capital in line with their ethics. They offer the Future World Plan and the Shariah Scheme.
The Future World Scheme, for instance, focuses on sustainability and stewardship in ecological, socio-cultural and governance matters. It invests in hundreds of firms around the world, who have owed to switch to the green economy – from the carbon economy to a 100% renewable energy source. The investment fund is managed by Legal & General (L&G).
The Shariah Scheme, on the other hand, invests in Shariah-compliant funds which are part of socially responsible capitalising the Islamic beliefs mould that. All the investment decisions are sanctioned by an independent Shariah committee that works closely with the fund administrator HSBC.
Here’s the best part:
You don’t have to kick your values to the curb when it comes to investing. You can make smart financial decisions while also catering to your principles and values. If you don’t love fish then there’s no need to invest in a firm that retails fish products just because they excel financially – you don’t want to spend the rest of you financially-rich life haunted by fish. All you have do is conduct research and choose an ethical investment fund that suits you best and thrive emotionally and financially – don’t settle for anything but the best!
Got Questions? Check These First
What's An Ethical Investment Fund?
It’s a mutual fund where investors make investment decisions depending on their ethical values. The investment option is marketed to asset managers who might have a moral disregard to particular investment firms. The primary objective of these funds is to ensure the social, ethical and religious values, as well as incredible returns.
Is Ethical Investing Possible?
Yes, it is. Nonetheless, while no investment is assured, the performance of ethical investment funds has shown to reflect the performance of the conventional investment option. In fact, recent research indicates that ethical investment funds might be more superior.
What Are the Types of Ethical Investment Funds?
There are various types of ethical investment funds. They include:
- Socially responsible investment funds
- Impact funds
- Faith-based funds
- Hybrid or blend funds4
- Money market funds or short-term debt
- Individual Savings Accounts
- Pension funds
Why is the Ethical Investment Fund Important?
Ethical investment funds practically help society to grow not only financially but also ethically. They promote the green economy, shun away corruption in organisations and protect human rights.
As the world moves towards a more sustainable future, investing in companies that are doing their part is essential. If you want your investments to be aligned with your values and beliefs, then an ethical fund may be for you. There are many different types of funds, but we recommend going with one that invests in renewable energy or clean water initiatives to do good while also being profitable.