Ethical Investments in the UK - A Comprehensive Guide
This article aims to help individuals to understand the world of ethical investing better. Using research from several experts and institutions in the industry, we provide a comprehensive guide on ethical investments. The increasing popularity of institutions, like the UK Sustainable Investment and Finance Association and the United Nations, provides evidence that ethical and sustainable considerations are more relevant than ever.
Table of Contents
Key Takeaways
- Ethical investments include personal values and beliefs when making investment decisions.
- There are three main types of ethical investments: socially responsible, ESG and impact investing.
- Companies can use the United Nations Sustainable Development Goals to make their goals measurable and tangible.
- There are multiple organisations like ShareAction and UKSIF, that advocate responsible investments and change in corporate behaviour.
What Are Ethical Investments?
In this section, we define what ethical investments are and detail the different types of investments available.
Definition and Concept
Ethical investment is a category of investing where decisions are made based on the values and beliefs of individuals. Essentially, investors try to allocate their capital to companies or investment funds with high social and environmental values. Traditionally, investing has largely been focused on merely making financial returns. Ethical investments go beyond making financial returns by trying to have a positive impact on society and the world.
Overview of Ethical Investing
Ethical investments encompass a wide range of possible investment strategies. For example, ethical investing can focus on environmental, social and governance (ESG) factors. ESG ratings of companies portray how ethically responsible they are. Companies that engage a lot in corporate social responsibility get higher ESG ratings than companies that do not.
Certain institutions like the UK Sustainable Investment and Finance Association (UKSIF) also support the increasing importance of ethical investments. These kinds of institutions enable investors to locate peers in the field to help invest in sustainable funds. Furthermore, over the last few decades, the stock and bond markets have experienced an increase in demand in the number of ‘green’ funds which are funds that have a low carbon footprint and/or invest in defeating the impacts of climate change.
On the London Stock Exchange, there are already more than 300 ethical bonds traded through its Sustainable Bond Market. This market totalled a value of more than 120 billion pounds in 2022. The number of green bond issuances, relative to the rest of the market, is also rising.
Types of Ethical Investments
There are three main types of ethical investing:
- Socially Responsible Investing (SRI): This is the more general way of ethical investing, where investors try to link values and beliefs to their investment strategies. Next to financial objectives, they incorporate the social and environmental impact of companies in their investments.
- ESG Investing: With ESG investing, people tend to focus on the environmental, social and governance ratings of companies. Rating agencies like Sustainalytics, MSCI and Bloomberg give listed companies ESG scores to provide investors a metric for the ethical conscience of companies.
- Impact Investing: This category of investing has one main objective: to achieve measurable environmental and social impact while still making financial returns. Investors who engage in impact investing want to see the actual difference they make with their investment.
ESG Factors and Criteria
Environmental Impact: The ESG ratings' environmental component assesses a company's environmental effect and its efforts to mitigate it. Carbon emissions, ecological footprints, and other sustainable activities are important measures.
Social Responsibility: The social impact of a company is measured through the way operations of the company affect groups of people like employees and communities. Essentially, it is the relationship an organisation has with people. A lot of these measures are focused on human rights and diversity.
Corporate Governance: This measures the internal operations of a company and to what extent they are ethical. Companies with high ratings in governance are often transparent in their decision-making, have executives who are held accountable, and engage in ways to minimize the risk of corruption and fraud.
ESG Funds and Financial Products
ESG ratings help investors to quickly assess whether companies invest in ethical and sustainable ways of doing business. High ESG scores imply that companies try to have an impact on the world that is ethically and sustainably valid.
When companies have high ESG scores, it means that they tend to be more resilient to the risk that is associated with ESG factors. As mentioned above, many institutions hand out ESG ratings to companies. By using the ESG ratings of companies like Sustainalytics, MSCI or Bloomberg, you can insight into which companies partake in sustainable practices.
However, it's important to note that these rating agencies all have different measures and metrics, which can result in different ratings across the agencies.
Performance Metrics for ESG Funds
People often believe that ethical investments yield severely lower returns than investments in other industries. When looking at the performance of ESG funds, we see that it can often outperform other traditional industries over time. However, past performance is not a reliable indicator of future performance.
When looking at the FTSE Environmental Opportunities All Share Index (EOAS) as a proxy for the performance of ‘green’ funds, the chart below shows that it outperforms other industry sectors, with only the technology industry performing better.
Remember this is just an observation of how different sectors can perform over time against each other. There have been significant downward trends over this period and the past does not guarantee the future as it is always changing.
Sustainable Investment Funds
Sustainability Criteria for Funds: Investment funds and companies that are listed on exchanges are always screened to assess to what extent they participate in ethical practices. The FTSE Russell often screens ESG index funds that invest in shares, while Bloomberg MSCI focuses on screening ESG index funds that invest in bonds. The screening looks at factors like non-renewable energy, weapons, vice products and controversial conduct. The combination of these aspects decides whether a fund is sustainable or not.
Impact Reporting and Investment Strategy
Impact reporting refers to the delivery of tangible metrics that show how certain investments or funds contribute to sustainable practices. They are often focused on where companies stand in their progress to achieve their sustainable goals. They can do this by looking at the progress towards the United Nations Sustainable Development Goals (SDGs).
Impact Investing Strategies
Impact investing is one of the investment categories that requires measurable social or environmental outcomes. In terms of measuring environmental impact, one can look at metrics like emissions, ecological footprints and electricity consumption.
However, social impact is much harder to measure. Some research has shown that microfinance can help to assess the social impact of firms. This is where you look at services that are provided to people with lower incomes. It gives an insight into social impact to some extent but does not fully capture the social implications of business practices.
The way impact investing strategies try to align with financial returns and social and environmental impact is through SDGs (Sustainable Development Goals). The United Nations SDGs set tangible goals that can be used by companies to measure their impact. The SDGs focus on for example quality education, reduced inequalities and climate action.
Impact Measurement and Reporting
Several tools try to translate the social impact of companies or funds into measurable metrics. Social Return on Investment (SROI, SRI or IRIS+) can help to make social or environmental impact more tangible. For instance, the SROI helps to assign monetary value to certain types of policies or practices. In that way, it is easier to see what the impact of one's investment is.
In order to give a transparent insight into the social and environmental impact of a certain company, quality reporting on those issues is required. This is often done in the form of ESG reporting which is typically arranged by an external auditor like PwC, EY or Deloitte.
Green Bonds and Financial Instruments
Environmental projects and issuer information: Green bonds are created to finance projects or firms that pursue environmental benefits. The International Capital Markets Association generated the Green Bond Principles, a set of rules and components that are essential when issuing green bonds. The principles describe factors like reporting, project evaluation and the use of financial proceeds.
Yields on green bonds have, historically, been slightly lower than traditional bonds. The difference between those two yields is known as a ‘greenium’. This basically means that, in general, investors are willing to pay a bit more for green bonds compared to other bonds.
Compared to other traditional bonds, green bonds are often utilised to finance specific environmental projects. These can be either long-term or short-term projects. This is the reason that maturities on green bonds can heavily vary. In general, long-term bonds are more common since payoffs can take a while with environmental projects.
Non-Profit Organisations and Consumer Organisations
In this section, we explore the role non-profit and consumer organisations play in ethical and responsible investing.
Share Action and Responsible Investment
Numerous organisations work hard to make companies behave more ethically and environmentally conscious. ShareAction is an example of an organisation that tries to change corporate behaviour on ESG issues. Individual groups of shareholders can also sometimes work together to utilise their shared power in a company to change the way a company is managed - this is called shareholder activism. In 2023, the number of activistic campaigns from shareholders increased by 36%, highlighting its increased importance.
Corporate engagement encompasses the way a business engages with all stakeholders. What organisations like ShareAction are trying to achieve, is increased corporate engagement of companies. This not only means improving the environmental practices but also means taking into account other stakeholders like employees and suppliers.
Ethical Consumer and Ethical Ratings
Instead of using ESG, you can also use specific ethical scores. For example, the GSG Ethical Score is a scale on which the ethics of companies and brands are assessed. The score is based on eight to twelve ethical criteria and provides ethical scores in seven extensive industries like fashion, energy and technology.
Besides using these ratings and guides for investment decisions, it is also possible to utilise them for ethical shopping. Using the GSG ratings, you get a clear view of what brands are engaged in corporate socially responsible behaviour.
How to Invest in Ethical Shares & Funds
With Admiral Markets, you can invest in over 4,500 stocks and ETFs from some of the largest stock exchanges in the world, with the following commissions:
- UK stocks and ETFs – 0.1% of trade value, 1 GBP minimum commission.
- US stocks and ETFs – From $0.02 per share, 1 USD minimum commission.
- France/Germany stocks and ETFs - 0.1% of trade value, 1 EUR minimum commission.
You can learn more about investing commissions on the Admiral Markets Contract Specification page. You can search for global stocks and ETFs from the Admiral Markets MT5 web platform and invest in four steps:
- Open an account with Admiral Markets.
- Click on Trade on one of your live or demo trading accounts to open the web platform.
- Search for your symbol at the top of the search window.
- Click Create New Order in the bottom window to open a trading ticket to input your trade size, stop loss and take profit level.
Conclusion
The concept of ethical investments is becoming increasingly popular. Data shows that the number of green bonds and other sustainable funds is growing. It implies that companies, organisations and investors are more and more willing to contribute to social and environmental progress.
Organisations like the UKSIF try to create networks to get more companies and funds to start investing in more sustainable practices. Retail investors can engage in ethical investment through ESG investing. Based on ESG ratings or other ethical ratings like the GSG, investors can make informed and impactful decisions. With access to thousands of stocks and ETFs from around the world, Admiral Markets offers ethical investors a large selection of instruments to choose from.
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