Some investors only feel comfortable with a responsible and ethical approach to investment, even though this may narrow their investment options.

Capital growth VS Income

Most people make stock market investments in the hope of a rising dividend payout coupled with capital growth. As we know, stock markets aren’t guaranteed to deliver this highly desirable combination over a particular timescale and, during the recession, many prices collapsed and some companies cut or suspended dividend payments.

That being said, investors live in hope of good gains in the medium to long term (though still not guaranteed). Spreading risk as widely as is reasonably possible has long been a generally accepted principle of sound investment. So, anything that limited the ability to spread risk across diverse business sectors would not make good sense, would it?

Is this ethical investment?

Well, some investors – both individual and institutional – tend to feel that there is one consideration that can rank alongside the financial, and that is the matter of ethics. They are prepared to forgo some degree of choice in order to invest with a clear conscience. But how can anyone be sure that a particular company doesn’t do anything ‘unethical’?

During the past decade or so, ethical investment has become such an important part of the financial scene that there are organisations that monitor the operations of quoted companies to ensure that they are not carrying out activities that fall within categories that ethical investors may want to exclude from their portfolios.

Contentious areas of investment

The business categories most widely treated as taboo for ethical investment purposes are: tobacco, alcohol, pornography, gambling and weapons. Any company operating primarily in these categories will not usually be found in the portfolios of institutional investors that operate an ethical policy when they consider investment opportunities.

Small investors may follow suit by choosing one of the ethical collective investment schemes available – provided that the fund and its riskiness suit their own objectives and attitude to risk – and accept its chosen exclusions. Larger individual investors with a range of direct shareholdings may make their own judgments about what is ethical.

There can be grey areas. Ethical monitoring firms, usually acting for major investors, sometimes identify trading links to ‘unethical’ companies. They may even, for example, flag up that an airline is involved in the alcohol industry because it sells drinks on its flights. Such secondary involvement is normally excused, if a small element of turnover.

‘Responsible investment’ considerations

An extension of ethical investment that has emerged in recent years is the concept of ‘responsible’ investment. Even the United Nations has had a hand in this, through its Principles for Responsible Investment, UNPRI for short. These principles bring environmental, social and governance (ESG) factors into the equation.

UNPRI is aimed less at individuals and more at institutional investors that have the muscle to exert some influence over the management of companies they invest in. This is more a matter of influencing companies by engaging with them on ESG issues rather than putting still more of them on any kind of investment blacklist.

Where does your conscience lie?

So, where does this leave the individual investor? Well, very much at the mercy of their own conscience. Investors should normally use their head rather than their heart, but this issue is something they are entitled to put on the table when talking to their adviser. The main thing is to understand the diversity implications and go in with eyes open.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.