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Ethical Criteria and Socially Responsible Investment:
A Guide to Choosing

There are so many factors to consider that choice is difficult but it's wise to be aware of them.

When researching Ethical Fund Managers or Ethical Independent Financial Advisers (IFAs) it's advisable that you choose and decide which socially responsible investment (SRI) or ethical investment criteria you wish to support and which to avoid and it could be that you will find it more complicated than you imagined. We hope this guide may help.
People have varying ideas and principles when it comes to SRI or Corporate Social Responsibility (CSR), and compiling their ethical financial portfolio; then the funds themselves have different ethical and SR objectives. You may wish to concentrate on including positive ethical or SR criteria, or you may wish to exclude certain negative criteria, or more likely a mixture of both (positive and negative screening).
Each Fund Manager or Financial Adviser will almost certainly offer different options and some will be more specific than others. You will often see ethical and SR funds referred to as being various shades of green: light, medium or dark green, with dark green funds applying the strictest criteria and then again there are engagement funds (see below for more details on these categories).


Spanish Cat Looks Warily
Spanish Cat Looks Warily. Click for Full View

You can support ethical and environmental issues by choosing ethical investments or SRI as all or part of your financial portfolio. This is also sometimes referred to as environmental investment, green investment and sustainable investment. SRI covers a wider brief than ethical investment, considering the economic and financial potential as well as the ethical, social and environmental performance of companies. The Co-operative Bank states that while traditional investment strategies focus on conventional economic and financial performance, sustainable investments aim to achieve good returns as well as considering the wider issues associated with ethical and socially responsible principles.

This table below gives some examples of features you might like to encourage or to avoid; it is not definitive. We compiled it by studying many ethical financial publications. It does show, however, how complex the issues can be and it is unlikely that you will be able to perfectly match your ideals. You might even like to swap some items from one column into the other. For example where would you place profitability?

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Encourage Avoid
Animal welfare Acid Rain
Birth control Alcohol
Communications Animal farming
Community relations Animal testing
Companies with good employee records Companies with bad employee records
Disaster relief Armaments
Education and Training Deforestation
Energy conservation & efficiency Gambling
Environmental technology Genetic research
Equal opportunities Human rights abuse
Firms with environmental aims Land abuse
Food retailers with good policies (eg organic, Fairtrade etc) Food retailers with bad policies (eg fast food, high salt, high sugar etc)
Forestry Military
Healthcare sector Motor industries
Healthy eating Nuclear power
Land use Oil companies
Plant welfare Oppressive regimes
Pollution control Ozone depletion
Positive products and services Pesticides
Public transport Political donors
Recycling Polluters
Renewable energy projects Pornography
Research (selected types) Research (re human tissue)
Safety concerns Road building
Sustainable 3rd world aid Third world exploitation
Waste management Tobacco
Water management Water pollution
    Different Shades (but don't forget the profits)
Ethical and Socially Responsible funds are frequently categorised into various shades of green and some are described as engagement funds. Investors, too, can have different aspirations, leaning towards light, medium or dark green investments, depending on the strictness of the criteria they choose to apply. Dark green investors narrow their investment choice because of the strictness of their ethical criteria. Light green investors normally tend to be less restricted in their choice of investments, preferring to take a 'more balanced' approach.
Light green funds, sometimes called 'best of sector', are inclined to reflect the weightings in the conventional investment market. They may invest in larger companies, mainly in the UK, Europe and North America, thus tending to reduce risks often associated with investing in smaller companies and other markets. Light green funds can include investments in oil, pharmaceuticals and banks, but usually not tobacco, environmental exploitation, armaments, animal testing or companies with poor human rights records.
Medium green funds apply stricter criteria than light green, but still allow some exposure to oil, banks and pharmaceuticals. Investments are made in smaller companies, again mainly UK, Europe and North America, with some investments in other markets.
Dark green funds, on the other hand, apply strict ethical criteria. In addition to the exclusions applied in the light green funds, exposure to oil, pharmaceuticals and banking etc, is severely limited. This means dark green funds with strict ethical screening may limit their performance by excluding whole industry sectors, for example gas and oil companies, from investment. Companies with poor management-employer relations or 'fat-cat' records are likely to be excluded. The percentage of investment in smaller companies is often higher than in larger companies.
Engagement Funds are those which are positively screened because they are investments which promote good behaviour. They could, for example, include companies which move and dispose of waste responsibly. The firms within this category are likely to incorporate sustainable development policies which (amongst other things) means that they will be pragmatic in balancing their costs and profits bearing in mind the ensuing benefits.
   

Ethical fund managers have considerable power and influence
Many fund managers responsible for ethical and SRI funds will have a team with the objective of assessing, establishing and monitoring the criteria and defining and rating an approved list of companies from which investments can be selected. Not only will they assess the nature of the commodities involved but the standards of behaviour of the management. Obviously, if you have particular issues of interest for your investment, the type of screening used by the fund managers will be important to you. However, even if you are light green and your criteria are not the strictest you should still have the satisfaction that you are creating a pressure to influence companies to become more socially responsible.


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  By Brenda Shaw
   
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Originated: Early 2001,   Updated: 28 October, 2013