What is Ethical Investing?
Ethical investing is an umbrella term used to describe an investment process which incorporates data on the ethical standing of companies and specifically their environmental, social and governance (ESG) practices.
This ethical data is incorporated into the traditional investment analysis process which focuses on the financial standing of companies.
Ethical investing traditionally involves the inclusion of one or more of the following practices in the selection of an investment:
> Responsible or Ethical Investment Screening
Companies are included or excluded from investment as a result of their ethical standing.
> ESG Integration
ESG knowledge is used to inform the analysis of the potential risk and reward that exists from investing in a specific company to enhance the financial valuation. For example data on a company’s corporate governance practices may be included.
> Engagement with corporations on ESG issues
Engagement is a process by which ethical investment management firms comply with company management in order to build the case for better ESG practices.
> Shareholder activism
Shareholder activism is a process where investors who are active owners of companies raise company resolutions or vote on company resolutions in such a manner that they promote better ESG practices.
Traditionally, most ethical investors in the UK have invested through socially responsible investment funds (SRI funds). These are baskets of investable assets such as stocks or shares which are picked by a fund manager on the basis of their potential to provide financial return and also the ethics of the underlying company. For example if the SRI fund invest in companies, the fund manager may only select companies which have good human rights records or environmental practices.