Q: I have just been left £10,000 by my grandfather. I would like to invest the money but don’t know how. I also have strongly held environmental beliefs, so don’t want my money to be invested in companies that harm the planet. Where do I start?
A: Your letter is very timely given the COP26 conference taking place in Glasgow. Lots of people hold strong beliefs in where their money should or should not be invested, and there are a plethora of different types of ethical and environmental funds to cater to these beliefs. Before you invest you need to sit down and work out what your investment parameters are and identify your red lines. Do you want a fund that avoids certain types of companies such as tobacco, one that only invest in environmental companies, or one that invests in companies trying to change their working practices to become more environmental?
According to Laith Khalaf, head of investment analysis, at investment platform AJ Bell: “The situation is not helped by a variety of approaches to ethical investing, with some funds simply tilting away from the worst environmental, social and governance (ESG) offenders, others entirely excluding them, and some funds actually seeking out companies having a positive impact on environmental and social issues. Industries are also taking positive action to curb less palatable practices. For instance, BP is aiming to be a net zero company by 2050, and Philip Morris has committed to a smoke-free future. Some investors still won’t want these stocks, but for others, transitioning may constitute enough for inclusion in a sustainable portfolio.”
Ethical and environmental funds fall into a number of categories although there will be some overlap, which makes doing extra research once you have decided on your investment approach vital. Remember the narrower the investment criteria the more it could impact on the return you receive. For example:Ethical or negatively screened funds have a moral investment criteria and avoid companies and industries that do not meet this. They are likely to exclude companies involved in oil and gas, tobacco and weapons manufacturer for example.
Sustainable and impact funds focus on companies that meet their sustainability related criteria. This may mean they invest in ‘bad’ industries such as an oil firm that is moving towards renewable energy. Impact firms take this one step further and measure the impact their investments have on the environment and society.
ESG integrated funds look at companies’ environmental, social and governance track records as part of their research when deciding where to invest. They work on the premise that good ESG policies will help strengthen a companies’ long term prospects. Some funds however will also avoid investing in certain corporate activities.In terms of how to invest, there are a number of investment platforms that can guide you and offer a range of funds. Look at websites such as www.ajbell.co.uk, www.hl.co.uk and www.moneyfarm.com. Also consider investing through an ISA so your money can grow tax free. Good luck.
