Friday Finance: ethical investing?

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Ethical investments

There are some managed funds that endeavor to match your values.  These are generally known as ‘ethical investment funds’. 

Some avoid investing in things you don’t like such as weapons, tobacco, abortion services, alcohol, gambling, carbon-emitting industries, genetically engineering crops, or whatever.  This is called ‘negative screening’.  Others actively seek out companies doing things you approve of like developing clean energy or being socially responsible.  This is called ‘positive screening.’ [i]  There are some funds that do both.

Read carefully about how exactly the fund chooses to invest, and also check out its main investments.  The funds vary greatly.  Some Islamic funds avoid compound interest while some Christian funds avoid pornography.  Environmentally-conscious funds might seek out public transport infrastructure companies.  Some funds avoid Israeli business due to the controversy over the Occupied Territories.  And then there are funds that like to add the term ‘ethical’ or ‘sustainable’ to their names but a glance at their main investments shows little difference compared to a conventional fund.  Just because a fund is labelled ‘ethical’ does not mean that it will necessarily match your own, specific values.

The returns tend to be comparable to other actively managed funds but as with those, fees tend to eat into profits.  From a purely financial point of view, index funds are better.

I first started my investing journey as a long-haired idealist by investing in a tree-hugging, socially conscious fund.  Upon closer inspection, I was surprised to find that a large proportion of the fund was invested in a highly government-subsidized, supposedly educational childcare provider.  That provider later went belly-up after its creative bookkeeping was exposed.[ii]  It was not only that, but also the realization that I was paying enormous fees for this ‘management’, which prompted me to move to index funds where I have been ever since.

In the end, you choose where to put your money and what limits you will set.  I suggest being realistic: will withholding your paltry amount of money from Lockheed Martin really prevent wars in the Middle East?  Will investing in a solar panel company that only survives through government subsidies really save the Earth?  And how much are you prepared to spend on high management fees for this conviction?

[Edit: Vanguard is now offering ethical managed funds for fees of around 1%, which is higher than I would pay but I guess not too outrageous. There are also funds that are kind of like index funds but they exclude some sectors (arms, coal, etc.) which offer lower fees but are a less specific way of investing ethically.]



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