Socially responsible investing: How to save & invest money ethically
For many people, increasing their wealth through saving and investing is no longer solely about profit. The past decade has seen the rise of socially responsible investing (SRI), also known as ethical investing, which involves paying extra attention to where money is going and what it's being used for, rather than simply the return on investment.
In fact, around 78% of investors said that this type of saving and investing has become important to them in the last five years, according to Schroder's Global Investor Study 2017. In particular, SRI is a major factor for younger people, with 86% saying it matters, but it also spans generations, with 79% of Generation Xers and 67% of Baby Boomers identifying it as an issue of concern.
But what is socially responsible investing and saving, and why is it important? In this ethical investment guide, we'll introduce you to the concept of SRI and look at what you need to consider when comparing opportunities. We'll also take a closer look at the best options for saving and investing ethically.
What is ethical investment and saving?
Ethical investing and saving is the practice of choosing how you save and invest your money in line with your own ethical principles. This means that you will be evaluating each investment opportunity or saving option with your own set of beliefs in mind, rather than simply committing to those that will grow your wealth the most.
Typically, this involves allocating your money to organisations that have practices and values in line with your own beliefs. For instance, if you had certain environmental convictions, you might choose to save with a bank that promises to lend to green initiatives or invest in a company that manufactures eco-friendly products.
Why should I invest and save ethically?
Choosing to invest and save ethically is a personal choice, so its significance really depends on your own outlook on the matter. However, there are a few common reasons why saving and investing in a socially-responsible way is a good idea:
- You can feel good about how you're saving and investing: The overall goal of investing and saving ethically is to bring about positive change to the world around you, and that's usually the main reason for choosing to put principles before profit. If you want to avoid contributing to certain industries or want to facilitate change elsewhere, then SRI is for you.
- You can find products to match your values: Thanks to high market demand, there are a plenty of options for investing and saving ethically, so you shouldn't have much trouble finding the right product to match your values.
- It's possible to be both ethically conscious and profitable: Initially, options for SRI were not widespread and the products that were out there didn’t perform well. But, as interest in ethically-minded enterprise has increased, ethical investment performance has grown, as has the variety of the opportunities on the market. This means that it's now possible to save and invest in line with your principles without sacrificing growth in your wealth.
- You can get involved in a passion project at ground level: If there is a particular issue you're passionate about, you may find a socially responsible start-up that you want to support. By investing ethically in their enterprise, you can help them find their feet and grow. Getting involved in something that you believe in from an early stage can transform an investment into a real labour of love.
What are the options for ethical savings and investment?
We've already mentioned that there is plenty of choice for socially responsible investing and saving. From funds that take much of the stress out of managing your investments to pensions that can help you save for retirement, there are a number of options to explore.
Ethical current and savings accounts
Over recent years, a spotlight has been directed at the ethics of traditional financial institutions, like banks and building societies, and the findings haven't been great. Points of concern have included poor practices, fraud, human rights violations, and contributions to climate change, making it hard for a growing number of people to justify saving with them.
Less confidence in traditional banking has seen the rise of 'ethical banks' that offer similar services, including ethical current and savings accounts, but utilise customer money in more socially responsible ways. This way, it's possible to save with peace of mind that your cash isn't being used for means you don't agree with.
Who are they for? Ethical banks are a good option if you don't agree with the ethical practices of major banks and building societies, but you still want to access many of the services that they offer.
Ethical pension funds
Pensions are one of the best ways to save for retirement. However, many private funds will channel your money into industries that you may have earmarked as unethical, such as fossil fuels or nuclear power, and there's often little upfront guidance about where your savings will be utilised. And, with 46% of people looking for pension options that reflect their social and environmental views (Big Society Capital), it's little surprise that ethical pension funds are gaining popularity.
Like savings accounts, ethical pensions employ both positive and negative screening to decide what they will and won't invest your money in. This means that you will need to do your research and go with a pension that matches the ethics you consider important. If you've already started a standard pension, you can usually switch to another one with your current provider, though you may need to pay a transfer value and additional fees if you wish to move provider altogether.
Who are they for? If you're saving for retirement or looking to start, the right ethical pension can match your values and give you peace of mind that your money is not contributing to unethical practices.
Fixed-rate securities, like bonds, are a popular low-risk investment due to their predictability and provision of a regular income. But, many of the most prominent schemes in the UK are backed by organisations like banks and the Government, which many people don't want to invest in due to their unethical practices in some areas.
Much like banking, the demand for more socially-responsible alternatives to traditional bonds has been filled by a variety of ethical bond products. From bonds that go towards green initiatives like wind farms and solar panels to those that fund motability schemes, there is plenty of choice if you're looking to invest in bonds as well as support an ethical cause.
Who are they for? If you're looking for a low-risk investment that will provide a predictable income, but you don't want to support an organisation with unethical practices, then ethical bonds may be the solution.
Ethical investment funds
One of the most popular methods of ethical investment is to put money into a fund, where it is spread across a range of interests by a fund manager. There are lots of ethical investment funds to choose from, though it can vary from fund to fund as to what they will and won't invest in. That's why it's important that you take the time and research which one matches your own ethical profile before committing, or you risk contributing to a cause that you don't believe in.
There are two main methods that fund managers employ to define what they will and won't invest in: negative and positive screening. Most funds will use one or the other, or even a mix of both. Negative screening takes place by excluding certain activities from investment that may be deemed unethical (fossil fuels, alcohol, intensive farming etc.), while positive screening sees a fund manager actively seek out opportunities that contribute positively (organic farming, green energy, public housing etc.).
Who are they for? Should you be looking to get into socially-responsible investing but have limited time to research each and every opportunity, a fund can manage your money effectively, as well as reduce stress. However, it's important to check a fund matches your own ethics and follow what investment plans are in place to ensure they continue in the same vein.
Another method of socially-responsible investing is to put your money into work in the community, usually with schemes, businesses, and individuals, providing essential finance where it is needed the most. There are a number of ways you can get involved in this type of SRI, including saving your cash in a community bank that offers a helping hand to the local area or subscribing to a community fund, which will make helpful ethical investments on your behalf.
Saving through a credit union is an option growing in popularity. They are financial co-operatives that are owned by their members, who can save, lend, and borrow money. They differ from banks because they are not-for-profit, which can eliminate much of the ethical issues that saving through a bank can pose. Credit unions are also more involved in the local community, as money stays within the membership, helping to fund individuals and businesses — rather than moved to interests elsewhere. They're well worth considering if you're looking for a community alternative to banking on the high street.
If you're looking to invest your wealth while helping others, peer-to-peer (P2P) lending can offer a relatively low-risk option. P2P lending platforms work by matching up willing investors with those looking for a loan, removing the need for a traditional bank or building society to act as an intermediary. With no banking costs, lenders and borrowers can both enjoy more favourable interest rates. There's also the potential to save your earnings in a tax-efficient way through an Innovative Finance ISA.
This type of investment delivers a return for investors, but also provides a valuable alternative to those looking for a loan. By investing in P2P, you could be helping someone make an essential improvement to their life: our statistics show 20% of borrowers use their loan to finance a car, 37% consolidate outstanding debt, and 18% improve their home.
Who are they for? Community investment is a type of ethical investment that will appeal if you're looking to make a direct impact on your own or other communities.
If you're well-versed in the stock market, there is also the opportunity to invest in companies or organisations that are aligned with your own values. Whether you want to back a new green start-up or put your money into a more established brand, the possibilities are virtually limitless when trading on the market.
Even if you aren't experienced in making investments, it's still possible to build a portfolio of interests by seeking the advice from a financial adviser who will be able to recommend suitable shares to purchase. There are even specialist ethical advisers who can tailor their advice to match your set of morals and beliefs.
Who are they for? Investing in ethical shares will allow you to put your money into companies or organisations that you believe in and align with your own ethics. Building and managing a portfolio can be challenging and time-consuming, so it may require a high level of expertise or the assistance of an ethical financial adviser.
What should I consider when saving and investing ethically?
If socially-responsible investing and saving sounds like a strategy that you'd like to adopt, then it's worth putting in the time to ensure it's the right choice. There are a few things that you need to consider when planning your approach to ethical investment.
Identify what you consider ethical
Before you even start to look at your options, you will need to define what you consider as ethical, so you can plan your savings and investments to match them.
Think about what causes you believe in and what you're against: you should be able to begin drawing up a profile of areas where you would be willing to put your money and those you'd like to avoid. For instance, you might be in favour of supporting environmental initiatives or green energy, and against any investment or saving with products that support fossil fuels or nuclear energy.
There may also be shades of grey that you need to think about when it comes to certain issues. An example could be that you're against animal testing for cosmetics but you're willing to consider for medical purposes. Some ethical decisions run deep, so it might take more thought to parse them.
Do your research
The next step is narrowing down your options and looking at what assets match your ethics. To do this properly, you'll need to do quite a bit of research to make sure you aren't missing anything about a potential opportunity. Many savings and investment opportunities aren't straightforward: they could meet your ethical requirements in one area, but if you dig a little deeper you may find that they go against another in a way you did not anticipate.
This is a particular concern should you be considering an investment in an ethical fund. Because each one is so diverse and has its own aims and manager, their definition of what is acceptable and what is not can differ wildly. One fund may filter out many industries you wish to avoid but might hold stock in a national bank or mining company that isn’t in line with your ethics.
Although it can take a while, it is usually possible to find a fund that's a match thanks to the diversity in the market. When you do find a suitable one, be sure to keep track of what industries it's continuing to invest in to ensure that it remains in line with your own ethics.
Consider using an ethical financial adviser
If you don't have much experience in ethical saving and investing, or you don't have the time to go through and research every opportunity, then employing the services of an ethical financial adviser can make the process more straightforward. As a qualified professional, they will be able to recommend the most suited financial products and, if you find one that specialises in ethical investing, they should be able to provide expert advice on building a socially-responsible portfolio.
An ethical financial adviser should sit down with you to establish a personal ethical profile before they make any recommendations. Thanks to their expert knowledge in the area, they will be able to identify the assets that best match your requirements. The most reliable way of finding an ethical adviser is to check the Ethical Investment Association's register, where you will be able to locate members in your region.
Think about your risk profile
Like any investment, building an ethical portfolio is likely to expose your wealth to risk, so you still need to consider how you're going to carefully manage your money. You'll need to decide whether you're averse to risk or if you're willing to take a more-aggressive approach, then choose asset classes to match your profile.
You should also consider how you're going to diversify your portfolio, as this is the best way of reducing risk and protecting your wealth. By making sure that your investments are spread across a variety of asset classes, countries, and sectors that still match your ethics, you can reduce the impact of any market disruptors on your wealth.
Look to strike a balance between performance and principles
While your ethics are likely to be at the forefront of your search for suitable savings and investment products, it's important to look into how the financial product has performed, too. By paying attention to whether an investment opportunity has been successful, you can ensure that you're not sacrificing the potential to grow your wealth in favour of making an ethical decision. It's possible to have the best of both worlds, so be sure to do your research.
If you're considering investing in a fund, take a look at its long-term performance, rather than just the last few years when it has been providing good returns. This will give you a better insight into what to expect should growth drop in the future. It's also worth speaking to the fund manager to see what their long-term strategy will be, which should help you to form an overall picture of what to expect should you invest.
Maintain a level of consistency
When you're considering where to save or invest, it's worth remembering what services and companies you make use of in your day-to-day life before you judge them as unethical. For instance, if you shop at a particular supermarket or have a phone contract with a certain provider, then it's difficult to dismiss them when thinking about your money. After all, if you're willing to spend with a brand, then investing or saving with them isn't much more of a stretch.
By applying a consistent standard of ethics across both your life and your finances, you can ensure that you don’t place unnecessary constraints on your options. This way, you'll find it much easier to build your portfolio.
If you're interested in investing ethically, the advice in this guide should help you take those first steps towards growing your wealth while making a difference with your money.
It is important that we highlight that with any peer-to-peer lending platform, your capital is at risk.