Ethical investing is an investment trend where an investor is guided by his personal ethics code and beliefs when creating an investment portfolio. The purpose of ethical investing is to support companies that are making a positive impact socially and environmentally, like green energy companies.
From the definition of ethical investing, an ethical fund is a fund whose investment choice is companies that do not harm the environment or society. As ethical investing increases in popularity, ethical funds will soon outperform conventional funds in different sectors.
Most people are skeptical about ethical funds regarding sustainability and return on investment. However, here is everything you need to know about ethical funds to help you venture into this growing investment opportunity.
Are Ethical Funds Good for Investment?
Unfortunately, there is no one-size-fits-all definition of ethics. Values and principles differ between individuals, and what is ethical may be unethical to another. So, your personal beliefs will lead you to an ethical fund to invest in.
The most common misconception about ethical funds is that investing in them calls for compromise on growth since most people believe they underperform. However, not all ethical funds are good for investment.
So, consider these factors that influence an ethical fund’s overall performance.
- The ethical fund’s investment strategy- is it clear?
- The period the fund manager has been in the role
- The parent’s group view on the ethical fund
How Big is the Ethical Funds Investment Sector?
Ethical investing is still small but is rapidly growing. This means there is potential for the assets managed under ESG to increase yearly. In addition, the investment industry has embraced ethical funds and investments, resulting in rapid growth. Currently, there are over 2500 ethical funds open to investors.
How to Choose Ethical Funds
The growth in ethical investments means that there are new entrants in the market, providing ethical investors with more options to choose from. First, however, here are some pointers when choosing an ethical fund.
1. Determine a funds investment process and philosophy
Identify the extent to which the managers embrace sustainable or socially responsible investment values and principles. This information is often available in their reporting. A company’s reports can help you understand how environmental, social, and governance factors are embedded into its core processes and operations.
This information will show you whether an ethical fund uses the ESG investing approach or a different approach. Also, check if the fund provides impact assessments of its holdings. This information shows that ethical investing is engrained in the ethical fund’s strategy.
Before investing, it is vital to do your homework and learn about a company. Check if the ethical fund relies on third-party or in-house research during your research. A company with in-house research can tailor its research to address issues that affect its growth or sustainability. Third-party research, on the other hand, may only provide general information that may not be helpful for the successful operations of an ethical fund.
3. Check the ethical fund’s policies
During annual meetings, fund managers should vote on the major issues. For instance, if the manager votes against the management, it could signify that they are focused on the fund’s profitability. You can find such information on a company’s website, where they document their engagement with companies that invest with them.
4. Consider the signatories
Viable ethical funds should be signatories of top responsible investment associations, like the United Nations Principles for Responsible Investment, to show that they are committed to responsible investment. They could also be signatories of other bodies as long as they establish benchmarks for socially responsible or sustainable investment.
5. Monitor transparency
Transparency requires that investees should be able to see the ethical fund’s portfolio in its entirety instead of its top 5 or 10 holdings. This information allows all underlying companies to be checked and considered for investment opportunities instead of closing them out.
6. Consider the ethical fund’s costs
Investments require you to stay keen on the costs incurred during the investment. And ethical funds are no different. So, pay attention to the fees incurred because they can erode your returns resulting in an unfruitful investment.
The ideal ethical fund should meet your values. In addition, conduct thorough research to determine that an ethical fund delivers on its promises to investors, especially if you intend to invest over the long term.