Ethical Investing: Keep Your Finances Safe With The Rising Cost of Living
Saving and investment are two of the core pillars for improving your financial security.
With the ever-growing cost of living, it's never really a good time to think about new financial responsibilities. However, ethical investing is just one way of keeping some of your finances protected during these difficult times.
It's not reliant on you investing tonnes of money, nor does it need you to change much about what you're currently doing.
So, if you can afford to - have a read of this article and get in touch for some advice before withdrawing or selling your current investments and doing anything drastic. Let's look at what you could gain in the long term.
What is Ethical Investing?
This is a form of investment that takes into account both the financial return and moral decisions of the investor.
In other words, it seeks to invest in companies or projects that have a positive impact on society or the environment, as well as generate a great long-term return for you.
There are many different ways to measure what is considered ‘ethical’ – but some common considerations include whether the company avoids causing harm to people or the environment; whether it promotes equality and social justice; and whether it operates in a sustainable way.
Ethical investing can be carried out with many different asset classes including shares, bonds, property and cash. These funds tend to be actively managed, which means the fund manager will make decisions about which investments to buy and sell in order to try and achieve the best financial return for you, whilst also adhering to the fund’s ethical objectives.
This isn’t a new concept – it has been around for many years. However, it has become more popular in recent years as people have become more aware of the issues that matter to them and want their money to reflect their values.
There are now over 300 different types of ethical funds available in the UK, with a total value of over £20 billion. This is still only a small proportion of the overall investment market but it is growing rapidly. In fact, according to research from The Investment Association, one in every eight pounds invested in the UK is now done ethically.
Why Has Ethical Investing Become More Popular?
There are a number of reasons for this increase in popularity.
Firstly, as we have mentioned, people are becoming more aware of the issues that matter to them and they want their money to reflect this, rather than investing without much control. People are significantly more aware and concerned about where their money is going and they are less likely to make brash or uninformed decisions that could negatively impact their current or future finances.
Secondly, there is a growing consensus that companies which act responsibly towards society and the environment tend to be better long-term investments.
Thirdly, technology has made it easier for us to research where our money is going and what impact it is having. And finally, as Ethical Funds have become more mainstream, there has been an increase in the range and quality of products available.
What are the Benefits of Ethical Investing
This can be a great asset for people looking for diversification away from some of the more traditional investments such as shares and bonds which may be impacted by environmental, social or governance issues.
The funds tend to be actively managed which means that the fund manager is making decisions about which investments to buy and sell in order to try and achieve the best financial return for you. Many of these have even performed better than traditional investments in the long term.
Of course, any kind of investing poses certain risks. But we need to remember that the economic challenges we've seen in recent months won't be about forever. Because of this, it is still important we make the money we do have work harder and protect the value of our portfolios.
Ethical investing offers the best chance of doing so and can be one with small sums of money - while you are managing day-to-day living finances. You don't need to throw huge amounts into it - but the extra you can spare will continue working and giving back by investing. Ethical funds have a proven track record and are becoming more and more commonplace.
Furthermore, the rising cost of living will affect certain sectors more than others. It is always important to do your research or seek professional advice before making decisions on where to invest. Even ethically, there may be certain sectors that fare better in the current economic conditions and so may provide less risk right now.
Diversifying your investments in this way can help you ensure earnings are at least matching or outweighing the inflation rates. Contrary to popular belief, holding your finances in a savings account even when times are tough can be riskier and you could fall into the trap of losing more than you gain in interest.
Possible Ethical Opportunities
There are several approaches to ethical investing. It is used as an umbrella term for all approaches to investing that consider values as well as returns.
Socially Responsible Investment (SRI)
This is an approach that takes into account environmental and social issues.
Your main concern as an investor in this case would not just be the metrics but whether the business' sources and values align with your own.
For example, if you are particularly passionate about environmental impact - your investments would likely fall into the green energy sector. Similarly, if contribution towards marginalised groups is a big part of your life, investing in women-owned or black-owned companies may be the path for you.
In the past, there have been doubts about SRI, with opponents arguing that narrowing the field of investment options also leads to a narrowing of investment returns. Now, there is a growing pool of evidence that shows the opposite: SRI isn’t just good for your morals, it’s good for your portfolio, too.
Environmental, Social & Governance Investment (ESG)
This is a more general term that includes SRI but also takes into account a company's impact on the environment and its workers, as well as its governance.
It goes beyond just making sure a company doesn't contribute to pollution or engage in unethical practices - but tries to make investments that will have a positive environmental or social effect.
For example, an ESG fund may invest in companies that are working to reduce their carbon footprint or those that are engaged in activities such as sustainable forestry.
As with SRI, there has been some debate about whether ESG investing leads to lower returns. But again, studies have shown that this is not the case - and if anything, data from the global research agency Morningstar has shown that many ESG funds have outperformed traditional investments in the long run.
Environmental: Contributing to tackling climate change, emissions, energy efficiency and deforestation.
Social: Concerning human rights, labour standards, child labour and health and safety as well as their inclusion to the local community.
Governance: Refers to the defined rights, responsibilities and expectations between stakeholders.
Investing During A Crisis
The current pandemic and resulting economic crisis have been a shock to many people's finances. But it's important to remember that this too shall pass - and in the meantime, there are still opportunities for investment.
Of course, you should always be cautious about investing during a time of uncertainty. But if you do your research and spread your risk across different sectors, you could see some good returns in the long run. Ethical investments may be particularly well-positioned to weather the current storm, as they tend to be more stable and sustainable in the long term.
So if you're thinking about ethical investing, now is a good time to start doing your research. There are plenty of resources available online, or you can get in touch with our expert team to discuss the best options for you.
This is a great way to make sure your money is working towards causes you care about - and with the current state of the world, there's never been a more important time to secure your long-term finances.
So Why Not Start Today?
Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Get in touch for help.
Get in touch with us today if you’d like to review your situation. As our name suggests, we have a wealth of knowledge in the field of pensions and can help you in making these all-important decisions before you take the plunge into retirement.
