phone icon0113 243 5693




An Introduction to Ethical Investment


We believe it is possible to plan your finances and invest your money in line with your values – without paying an unnecessarily high price in terms of risk, returns or charges.

Since the 1980’s the demand for ethical investment has steadily increased as people have become disillusioned with “non-ethical” investments and have asked that their money be invested in ways which reflects the values by which they live their lives.

A majority of our clients now choose to invest in an ethical or sustainable way. We have always asked people about their values and increasingly they articulate a concern for ethical, environmental or social justice issues and wish to align their financial planning with their lifestyle values.


The term ethical investment is often used interchangeably with socially responsible investment (‘SRI’), sustainable, ecological or green investment. The main difference with a normal approach is that investments which are considered “non-ethical” (because of various factors – moral, social or environmental) are left out of your portfolio.

The Ethical Investment Research Service (EIRIS) defines an ethical fund as “any fund which decides that shares are acceptable, or not, according to positive or negative ethical criteria (including environmental criteria)”.

One could apply this definition to a general ethical investment philosophy by saying:

“Ethical investing is the process of making decisions about buying, holding and selling investments, based on whether they are perceived as acceptable according to both positive and negative ethical criteria.”


Archbishop Welby got into bother in 2013 when he criticised Payday Lenders. Everybody cheered him on but then he was embarrassed to discover that the CofE Pension fund has a holding of about £75,000 in high-profile payday lender, Wonga. That means that the CofE’s portfolio is exposed to Payday lenders to the tune of .001%. Does that mean it is unethical?

When you decide to exclude on the basis of a specific criteria it raises the question of the extent to which such investments are perceived to be acceptable. You might be very strict and say, “No Wonga at all” in the CofE portfolios.

But is it okay to invest in Barclays Bank? They don’t do Payday Loans but they do provide banking services to Wonga. Or, is it okay for the Queen to own an office property in Primrose Hill which is rented out to Wonga (because she does through her property portfolio)?

And that’s assuming you think that payday lenders are a bad thing. Ethical and environmental criteria are subjective. Most people would say that cigarette companies should be excluded but there might be mixed views about alcohol, or armaments or pornography or animal testing.

And even if you have a company that only does good things – let’s say it recycles paper – how do we know that it pays fair wages to its staff, pays all its taxes and only uses energy saving lightbulbs in the factory?

It’s a puzzle! So the ethical investment market has developed some broad strategies and standard practices which try and simplify and categorise the way we approach traditional ethical investment through to the more recent SRI (Socially Responsible Investment).


  1. Ethical Screening:
    The inclusion, or exclusion, of companies in an investment portfolio on ethical, social or environmental grounds. Ethical screening is usually divided into negative screening to exclude unacceptable companies, and positive screening to select companies with superior social or environmental performance or contributions.
  2. Thematic Investment:
    Where key themes are used to identify companies operating in “industries of the future”. Ones which are trying to improve the world environmentally and socially e.g. sustainable forestry, healthcare etc.
  3. Best-in-Class or Preference:
    Where companies within the same industry or sector are rated according to a variety of social and environmental issues, and fund managers bias their investment decisions toward the “best-in-class.”
  4. Engagement:
    Identifying companies which could improve their ethical, social and environmental behaviour and encouraging them to do so by means of dialogue, pressure, support for responsible management and voting at AGMs.


An investor can apply an ethical strategy to almost every part of a savings and investment portfolio:

  • Bank Accounts – (e.g. Co-op Bank, Triodos Bank or local Credit Unions) which have a policy of ethically screening the loans they make to companies;
  • Shares and other direct investment – in socially-responsible companies, social enterprises and not-for-profit organisations with a social benefit;
  • Corporate Bonds – fixed-term loans to socially responsible companies;
  • Investment funds – directly or via ISAs, Pensions, Life Policies, banks;
  • Community Investor Accounts – Limited availability UK investments designed to benefit communities (this type of investment has been offered by offered by Triodos Bank);
  • Micro-credit accounts – (e.g. Shared Interest accounts) designed to provide a fair source of finance to people in developing countries;
  • Specialist managed portfolios – For trustees, pension funds or individuals with greater sums to invest (typically more than £200,000) – these are invested using ethical criteria agreed by the investor;
  • Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT) – Investing in themed investments such as wind or solar power;
  • Social Impact Investment – this involves investing in a more targeted way in social enterprises and is something that the UK Government is seeking to encourage in the future by means of its new Social Investment Tax relief. At the time of writing this legislation is in its draft stages.  Assuming that it is passed it will allow investment in social enterprises with similar tax benefits to an EIS.

Ethical Investment Funds

There are over 40 fund managers offering some sort of ethical fund. Around 30 of these are readily accessible to the private investor. However, they all operate in different ways using one or more of the 4 general strategies identified previously.


Ethical investors believe that they should not (or need not) sacrifice their life principles in exchange for chasing the best financial returns. Indeed, many ethical specialists argue that, in the long term, ethical and SRI funds have good prospects for out-performing the general investment sectors.

Ethical funds are usually expected to be more volatile than “non-ethical” equivalents. This is because there are periods in the investment cycle when certain non-ethical shares do particularly well – tobacco, alcohol and armaments being the obvious ones. Then again, there are periods when the more speculative and forward-looking funds come good. Over the long term, many ethical funds have produced very good returns.

One of the largest UK Ethical Funds, the Friends Life Stewardship Fund, has provided a return of 8.52% per annum, on average, since 1984.

The performance of ethical funds is often benchmarked against either the FTSE 4Good indices or against their non-ethical peer group.


Since ethical investment, by definition, reduces the universe of shares, securities or funds from which you can select, it tends to increase the volatility of your portfolio and therefore the risk profile.

The risk can be mitigated by diversifying between different asset classes (e.g. by blending shares and fixed income assets) in the same way as you would do with a non-ethical investment portfolio. Diversification can be further achieved within asset classes by carefully selecting the funds of different fund managers offering differing approaches.


It costs more to run an ethical fund since, in addition to the usual investment disciplines of selecting stocks and shares, the management team have to apply further expertise (and systems) in order to perform the necessary ethical screening. This is usually reflected in a small additional charge, which can slightly erode the investment performance.


There is a strong case for investing ethically. Not only can it allow a convergence between your finances and ethical values but with prudent selection of investments it can also deliver a competitive financial return.

We believe it is possible to plan your finances and invest your money in line with your values – without paying an unnecessarily high price in terms of risk, returns or charges. If you are the sort of person who wishes to apply ethical values to your investments, we can help you do it.


© Flowers McEwan Ltd, April 2014


No comments so far!


Leave a Comment