When you use a retail bank, they earn money by investing your money according to the bank’s priorities so that it can meet its promises to you (guaranteed or maximised returns, e.g.). Your money is then passed to an investment organisation; these companies prioritise financial returns, once they have screened out any investments that are deemed inappropriate (the most controversial areas, e.g.). This might mean that some of your money gets invested in something that has high financial returns and is not currently deemed as risky (a company whose profits are high, for example, like oil companies). Because organisations causing Climate Chaos are often highly profitable and very valuable, they are quite likely to form a significant part of where your money is invested.
- Why is my money being invested unethically?
- What is a portfolio?
- What is ethical investment?
- What is Socially and Responsible Investment?
- How Environmental, Social, and Governance (ESG) evaluation work?
- What is impact investing?
- What should I watch out for?
- Might I lose out financially by investing ethically?
Your savings and pensions are invested in one or several portfolios whose value and return constitute your capital. A portfolio is a grouping of financial assets such as companies stocks, bonds (debt hold upon companies or states), commodities (oil, steel, gold, corn, …) or currencies. A portfolio can also consist of property rights on non-publicly tradable assets such as shares of non publicly traded companies, real estate, land or art. Most portfolios seek diversification in their composition to not put all eggs in the same basket. Portfolios are held directly by investors and/or managed by financial professionals and money managers through saving and pension plans. Investors can also have multiple portfolios for various purposes (retirement, paying children studies, buying a house).
Investors may construct an investment portfolio in accordance with:
- Their tolerance for risk and their appetite for high financial returns (adventurous, balanced, conscious)
- Their investment horizon (cash-equivalent, short-term, long-term)
- Their knowledge of the specific market they invest in
- Their ethical values
Take the time to define what you expect from your portfolio. This will be key to find the investment solution which suits you. For example, you may keep part of your saving directly accessible in a mainstream ethical plan, while another part may be invested in the longer term in an impact investment fund (see definition below).
Ethical investing refers to the practice of using one’s ethical or moral principles as the primary filter for the selection of investment options.
- Ethical investing depends on the investor’s conception of what is ethical and what is not. This alignment between a set of value and economic activities may be rooted in religious, political or environmental concepts.
- Most ethical investment solutions use a negative screening to eliminate from their portfolio specific industries whose activities are opposed to their values (example: firearms manufacturers).
- Some ethical funds also use positive screening to select specific companies whose activity or ethical positions are aligned with their values (example: fair trade companies)
- Ethical investors typically avoid investments from sin stocks, companies involved with stigmatized activities, such as gambling, alcohol, smoking, or firearms.
- Ethical funds does not always take into account climate change and environmental protection in portfolio management.
You should carefully ask your financial advisor or read the documentation to check if the ethical options you are offered coincide with your ethics. You may ask for examples of selected or excluded companies.
Impact investing refers to investments “made with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments provide capital to address social and/or environmental issues. Impact investing is still a niche market, but it develops rapidly
Impact investors can provide financing solutions to Social Purpose Organisations (SPOs). SPOs create new business models to address social, environmental and economic challenges and are often delivering products, services and assistance to populations that are excluded from mainstream markets or out of reach of the public sector.
Most reputable financial institutions will take a position on the ethics of money management; they may call this ‘Responsible banking’ or similar. The responsibility they may be referring to is financial, i.e. making sure they give you ‘value for money’ and not necessarily socially or environmentally responsible. Also, look out for ‘best-in-class’ fund screening, Positive Screening and Negative Screening; Best-in-class investments are made in the most responsible organisations within a sector, and can be seen as a way of encouraging a shift to better policies, but bear in mind that it could, ethically, be ‘the best of a bad bunch’. Positive Screening selects organisations that are actively pursuing responsible corporate behaviour (i.e. can demonstrate they have ethical goals and outcomes). Negative screening is deliberately avoiding organisations that perform poorly in ethical terms. By screening funds, you can make a better ethical position, but it is difficult to avoid all ethical concerns because financially viable organisations often operate in different cultures with different expectations.
We cannot advise on the financial impact of shifting your money, you should seek independent advice. Do bear in mind that by investing in a more limited choice of areas, you may be more exposed to risk. Conversely, there are arguments that investing in unsustainable companies may give poor returns as Government policy and regulation shifts to tackle the Climate Emergency.