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A ‘long list’ of ethical funds, trusts and ETFs aimed at investors wanting to do good while also making money has been launched by online platform Interactive Investor.
To break through the usual jargon, the firm has split the 140-odd options into three categories – ‘avoids’, ‘considers’ and ’embraces’ – to explain their dominant investing style.
The list doesn’t rate fund performance, but is an attempt at showing people the full range of ethical investments available and signposting their approach to picking stocks or other assets.
Ethical options: Some fund managers look for companies actively trying to achieve measurable social or environmental benefits
However, the purpose of all funds included is maximising returns in line with their remit, not philanthropy or charity.
A recent survey of II’s customers found 40 per cent found the terminology around ethical investing complicated, so as well as organising funds into just three broad categories, it is also offering a jargon buster to help make their names clearer.
How are ethical funds tagged on the ‘long list’?
‘Avoids’ means a fund focuses on excluding certain companies, sectors or business practices for moral reasons.
This is a traditional method of ethical investing that typically screens outs so-called ‘sin’ stocks, or businesses involved in tobacco, gambling, weapons, porn and alcohol.
‘Considers‘ means funds look at environmental, social and governance issues (commonly abbreviated to ESG) when choosing investments.
For example, they might invest in ‘best of class’ companies that score comparatively well in these areas in their industries.
‘Embraces’ means funds seek investments that make a positive difference to the world.
Managers look for companies actively trying to achieve measurable social or environmental benefits. This is also sometimes known as ‘impact’ investing.
II explains that if a fund manager uses some combination of these approaches, it assigns the one that prevails most strongly in their investing style.
The firm developed its list in partnership with independent specialist SRI Services and data firm Morningstar.
It plans to monitor the market for new launches and fund managers who adopt ethical screening, in order to expand it in future.
Meanwhile, SRI Services will keep an eye on funds already on the list to check if they are maintaining a robust, ethical approach.
How to choose: To break through the usual jargon, the firm has split the 140-odd funds, trusts and ETFs on its long list into three categories – ‘avoids’, ‘considers’ and ’embraces’
Moira O’Neill, head of personal finance at Interactive Investor, says: ‘It’s no secret that investors who want to invest for good have been poorly served by a financial services sector that overwhelms them with jargon – it’s time for change.
‘The “Avoids, Considers, Embraces” categories are a clear, jargon free steer to aid selection, without putting any funds into a “niche” box that can easily be ignored.
‘The aim is that this will start a conversation rather than prescribing and creating something static.
‘So, in the same way that we have taken guidance from experts at SRI Services and are extremely grateful for their input, we are very open to feedback from investors and the industry.’
Julia Dreblow, director at SRI Services, says: ‘Investors are uniquely well placed to help solve many environmental and social challenges.
‘Indeed, without the support of investors it is hard to see how existential threats like climate change and biodiversity loss might be addressed.
How to pick ethical investments that ACTIVELY benefit society and the environment
Read about how to do this and find expert fund recommendations here.
‘The mainstream investment community has been slow to recognise this and even slower at bringing it to the attention of individual investors. The fact that such challenges present both real and immediate investment risks and opportunities has been buried even deeper.’
Regarding the avoid, consider and embrace tags, she adds: ‘Although there is significant variation within each of these three groups, each of the listed funds has more to say about ethical, social and/or environmental issues than the funds that are not on this list.’
Jason Hollands, managing director at financial services firm Tilney Group, has previously warned that ethical or ‘responsible’ investing is a banner that covers a wide range of approaches.
He said some investors assume ethical or responsible investment funds will be packed full of renewable energy companies or community projects, but in reality most are largely invested in recognisable businesses that fund managers assess as adopting high standards on governance and social responsibility.
‘You should firstly decide what matters to you and which issues are an absolute red line in the sand for you, before you invest,’ he told This is Money.