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How to make an ethical portfolio

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.

We all hold values which influence how we live our lives. We might buy Fairtrade or shop locally, for instance. Yet whilst these might feel straightforward, investing ethically – e.g. putting money into companies and industries which reflect your values – can seem confusing. How do you do it and where do you start?

Fortunately, constructing an ethical portfolio of investments can be achieved by ordinary people. Below, our financial planning team at Castlegate in Lincolnshire shows how this can be done. We hope you find this content helpful. If you would like to discuss any of these matters or discuss your own financial plan with us please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585


Defining ethical investing

Here, there are many definitions to contend with. These include green investing, ESG investing (environmental, social and governance), socially responsible investing, sustainable investing and impact investing. Whilst each may stress a different aspect of ethical investing, they all seek to generate returns whilst creating positive change in the world.

Your idea of what is “ethical”, however, will vary from others’ and will be based on your own moral code. This is why it is vital to clearly identify your values when constructing your portfolio and when looking “under the hood” of different investment opportunities when considering whether or not to include them. For example, you may hold a strong belief in renewable energy and wish to avoid investing in any oil companies. Or, perhaps you hold gender equality very close to your heart and want to invest in businesses promoting this cause within their industry.


Can ethical investing generate good returns?

There is a common belief that ethical investing, by its nature, involves sacrificing some of the returns you might have gained elsewhere in the equity markets. Yet this is not necessarily true. One study showed that, for a sustainable fund invested in large global companies, the average return over a 10-year period was 6.9% per annum. For a traditional fund, however, the rate was 6.3%. This is not to say that ethical funds are always more profitable than non-ethical funds but does help show that the former does not need to lead to underperformance.


How to invest ethically

Building an ethical portfolio does not need to become a huge project with hundreds of hours put into research (although it can be!). Here, you will need to decide how much work you wish to commit. You might be the sort of person who wants to open their own account on an investment platform and work through each investment one-by-one, doing your own due diligence before adding the qualifying candidates to your portfolio. This is a lot of work however, and can lead to tax inefficiencies and lack of diversification if you do not fully know what you are doing. As such, most busy people will likely benefit from professional financial advice to help do the heavy lifting for you.

Another step involves choosing your strategy for making your portfolio more ethical. Here, there are at least five different approaches you could take:

  • Negative screening. This is perhaps the most “radical” framework you can adopt for your ethical portfolio – where you exclude all companies, industries and markets (e.g. countries) which do not fully align with your moral values. This might mean avoiding any jurisdictions where human rights abuses occur or avoiding companies engaging in unfair labour practices or environmentally damaging activities – such as oil extraction.
  • Positive screening. Here, an investor may not necessarily exclude companies such as the aforementioned. Rather, they may instead invest in those which are outperforming their peers on certain ethical issues – such as boardroom gender equality.
  • Integration. This takes a more balanced approach whereby an investor gradually brings more ethical funds and companies into their portfolio (e.g. based on performance) to sit alongside their more “traditional” investments.
  • Impact investing. A more project-based approach where investment is set aside for a specific goal – e.g. building a fund which provides micro financing to a poor community.
  • Active ownership. Here, an investor can use their influence as a shareholder within a given company to raise ethical issues with management and propose changes in policy, behaviour or structure. For this, you will likely need a large ownership stake.

Whichever approach you decide may be best for you, it will still be important to go through the necessary steps involved with building a strong investment strategy. This involves establishing your goals, investment horizon and risk tolerance. You should also consider whether you wish to include passive funds in your portfolio or actively-managed ones, especially since many ethical funds in 2021 comprise the latter. A financial adviser can help you walk through these steps and craft a strong portfolio which is regularly monitored and rebalanced periodically (to ensure your asset mix continues to stay on track).


Conclusion & invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585