Many of us make socially conscious decisions on a regular basis – especially when it comes to our money. From the products we buy to the places we shop – we might have causes close to our heart that we support, or boycott certain organisations and products that we disagree with.
Another growing trend is to make sure our moral views are reflected within our personal finances. This has led to many investors choosing to take an ethical approach – often referred to as socially responsible investing.
What is socially responsible investing?
In a nutshell, it means making sure your capital is invested in a way that mirrors your views on the world. There’s a wide range of socially responsible funds available, which focus on environmental, social and governance causes.
If you care about how your money is invested – and the source of the returns you receive – socially responsible investing might be right for you.
There are thousands of investment funds available in the UK. Each has their own mandate and objective, including which asset classes and global regions they can invest into.
A socially responsible fund takes a different focus.
Whilst they are also looking to deliver strong returns for investors, they focus solely on businesses and companies that share certain values. Their core objective is to generate strong performance for investors, but this principle does not result in the sacrifice of other core beliefs.
As with all investments, your capital is at risk and you may get less than you originally invested.
“Some socially responsible funds invest into companies which aim to address a certain issue – like the threat of global warming – or organisations that make a positive difference to communities. “It could also mean steering clear of less desirable themes – such as weaponry – or companies with poor human rights records.”
Scott Ashworth, Senior Technical Research Adviser at Skipton.
Like regular investment funds, a fund manager is responsible for putting together a portfolio of assets as part of an overall strategy. Where socially responsible funds differ is they might focus only on certain investment areas, and deliberately steer clear of others that don’t necessarily support our wellbeing. Alcohol and tobacco, for example.
What is definitely the same is that the value of your investment and the income from them can fall as well as rise.
How do socially responsible funds perform?
A common perception of socially responsible funds is that their performance will potentially be worse than more conventional funds. Ashworth argues this doesn’t have to be the case, “In our opinion, the performance of socially responsible funds can be different across a full market cycle, but it doesn’t necessarily mean it will be worse.
“There could be periods where they under-perform more regular funds for a spell, but at other times they can also deliver out-performance. Over the longer-term in particular, growth in demand for certain types of companies or assets – such as renewable energy – could mean that socially responsible funds are well-positioned to benefit.”
How do socially responsible funds select and manage assets?
A screening approach is used to find companies that have a socially responsible stance to business, practices and services.
At the same time the fund screens out those who fail to meet its criteria, such as excluding companies they believe impact on society or the environment in negative ways.
Many socially responsible funds go deeper in their company research in order to assess more complex areas. Labour relations, for example.
Socially responsible fund managers can also look at different themes when identifying suitable assets/companies to invest into – depending on the fund’s individual mandate.
Themes include investing into companies or products that address issues – such as energy efficiency – or steering away from areas that don’t necessarily support our wellbeing.
From their position as shareholders of a business, fund managers can actively pressure companies into employing more ethical policies.
Adopting these practices might also boost performance of the business (and thereby the share price). This in turn boosts the overall returns the fund achieves.
Tailored financial advice, suited to your view on the world
If you have strong feelings towards particular issues, we can offer you advice on finding a fund that best matches your views. We have put together a panel of socially responsible funds which could mirror your ethical views, and core beliefs, on how and where to invest.
By speaking to an adviser you can find out if any of these are suited to your personal circumstances, including your attitude to risk.