Right on the money: Aligning your investments with your values

Lots of people come into Lewes Climate Hub asking how they can bank and invest in a way that’s actually good for the planet and people (or at least avoids harm). In a new monthly column, chartered financial planner Tony Fuller of impact and ethical specialists Path Financial explains your options.

A growing number of people are trying to live in a way which is more environmentally sustainable and socially conscious.  There are many ways of changing the way you live, and one particularly powerful action is changing what you do with your money.  ‘Money talks’ as the expression goes!

This could mean changing who you bank with to avoid those banks financing fossil fuel companies (more on that another time) or it could mean aligning your investment portfolio with your values by investing ethically. The term ‘ethical investing’ covers a wide spectrum of approaches, from simply avoiding harm to actively investing for positive impact.

Understanding the options and considering your own values is the first step.

The spectrum of ethical investment

Ethical investing isn’t a single idea or strategy; there are many options that differ in style, objectives and impact. At one end are investors who want to avoid causing harm by screening out companies doing bad things.  At the other end you can actively invest into companies already having some kind of measurable positive impact on the world.

Negative screening
This is the oldest form of ethical investing. Negative screening involves excluding some industries or companies to avoid harm from an investment portfolio or a professionally managed fund. Typical exclusions include fossil fuels, tobacco, weapons, gambling, or companies with poor labour or human rights records.
For example, a climate-conscious investor might screen fossil fuels companies.

Positive screening
Positive screening further refines the universe of viable investments to achieve a given strategy. These positive screens aim to achieve better sustainability outcomes versus a traditional market portfolio.

This can be achieved in two main ways:

• Investing in companies providing solutions to social and environmental challenges: For example, a climate solutions portfolio would invest in companies that provide solutions to climate change, therefore reducing carbon emissions in the real world. This could include companies involved in, for example, renewable energy, electric vehicle production, technologies that improve energy efficiency – or even an agricultural business focused on regenerative farming.
• Investing in companies that integrate good practices in their operations: These are companies that perform well on environmental, social, and governance (ESG) factors compared to their peers. They may not directly provide a solution to social and environmental challenges but have, for example, ambitious carbon reduction plans, strong diversity policies, or good ‘corporate governance’ (how the company is managed and how transparent it is about its activities). So positive screening can assess how companies in any sector – from banks to supermarkets to tech or engineering firms –  score on ‘ESG’ factors compared to their competitors.

These strategies typically also use negative screening to immediately filter out arms, tobacco and other companies directly doing harm.

Positive impact
Positive impact refers to investment strategies that aim to contribute towards solving social and environmental challenges, often using the United Nations’ Sustainable Development Goals (UN SDGs)  as a reference framework. These strategies seek both financial returns as well as measurable social or environmental outcomes from the companies they invest in. This is achieved by investing in companies whose products or services address one or more of these sustainable goals.  For many climate-focused investors, this approach represents the gold standard.

Which one is right for me?

That depends on you and your values and (potentially) your financial objectives. There is no right answer to this question and some thinking and research is required before jumping to action.  Unless you know what you are doing both from a financial and investment context, you should consider taking financial advice too.

How investors can access ethical investments?

There are various ways to access ethical investments.  The most common are;

• Your workplace pension
  For many people, the biggest ethical impact they can make is through their pension. This is because pensions are where most people have the majority of their invested wealth.  Most pension schemes now offer ethical investment options of various types and some workplace pensions include some ethical overlay on their ‘default’ investment fund (the fund your money will automatically go into if you don’t actively make an investment choice).

• Do-it-yourself (DIY)
  You could manage your own investments through an online investment platform, many of which advertise on TV or in the personal finance section of the newspaper. Most platforms offer a range of ethical, sustainable, and impact-labelled funds.
  Some let you filter by ESG or sustainability criteria. The FCA have also released a new fund-labelling regime which can help identify funds meeting various standards and reporting requirements.  You should only DIY if you are confident that you know what you are doing both in terms of the investments and wider financial implications (tax, risk, capacity for loss etc.),
• Investing via a specialist financial planner
  Many traditional financial advisers find it difficult to advise clients with ethical values because they don’t share those values or have the skills to properly discuss them. Even where they do, many traditional advice companies do not have the investment options available to cater for a range of ethical values.  If you would like to take financial advice, then you should consider approaching an advice firm that specialises in ethical investments.  A specialist adviser will help you invest in accordance with your own values (they will probably have a few options) and will also help you create and execute a wider financial plan.

Next month: Ethical bank, savings accounts, and mortgages

About Path Financial
Path Financial is a chartered financial planning firm at the forefront of impact and ethical investing, dedicated to helping our clients secure their financial future while contributing to a sustainable world.  If you are interested in talking to us, then please do reach out and contact us.

Disclaimer: With investing, returns are not typically guaranteed and there is the risk of capital loss.  You should consider taking financial advice before making any decision to invest.