Answering Your Questions On Ethical Investing

Posted by Simon Moore on March 21
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What Is ethical investing?

Ethical investing is making sure you are investing in companies that have a positive impact.

 

How does ethical investing work?

Basically, it’s a top tier investment service using ethical investments.

 

The investment process is identical to traditional investing. A range of different investments are combined across different countries sectors and investment types in a way that is expected to offer a robust return, based on historical models, but estimated risk is also controlled. Fractional investing is also used, so that small contributions can be put to work in a balanced way, and some currency risks are hedged so that currency moves are less likely to impact your return.

 

So what makes ethical investing different?

Two things. Firstly, industries considered harmful are excluded from portfolios. Secondly, only better managed companies in terms of environmental impact, social impact and governance are included in portfolios.

 

Which industries are excluded?

Companies that are in industries that are considered harmful are excluded. These industries include nuclear power, weapons, GMOs (Genetically Modified Organisms), tobacco, alcohol and adult entertainment. This set of industries may change over time according to MSCI criteria.

 

What does including better companies mean?

Companies are scored on their environmental impact, their social impact and their overall governance. Better companies receive better scores. Weaker scoring companies are either excluded or receive a lower weighting within the index.

 

What does governance mean?

Governance is how well a business is managed. For example, if senior management is over-paid, the company has legal or accounting issues or doesn't appear to have strong oversight in place then those issues would lead to a poor governance score.

 

Who decides what to exclude and how to score companies?

This work is done by MSCI, one of the leaders in the industry. They have a 170 person team monitoring thousands of companies, and hundreds of thousands of different investments.

 

Do you include bonds in ethical portfolios?

Yes, bonds issued by the British government are included, as are bonds issued to support green projects and bonds issued by companies using similar screening criteria as described above.

 

How might an ethical portfolio perform relative to a traditional portfolio?

Historically, risk-adjusted performance has been similar. Though Moola’s fees are the same, the expense ratios (the fund cost) for ethical funds are slightly higher, given the extra work involved in screening companies etc. which may slightly reduce performance.

To the extent that ethical investing becomes more popular over time, that may increase the performance of ethical investment techniques.

Also, given that ethical investing includes a slightly different set of companies and sectors, this may alter performance over periods of time depending on how the economy performs. This doesn’t necessarily mean that ethical portfolios will perform better or worse, just that any given period may see differences between ethical and traditional portfolios.

 

How do I get started?

You can sign-up on the Moola site.

 

Can I have an ethical ISA?

Yes

 

What else is different about ethical portfolios?

Not much - the key differences are selecting investments expected to have a positive impact, otherwise the frameworks and processes used are very similar.

 

What if I want to change from ethical to traditional (or vice versa)?

You can, please contact us to do so. Note that changing your portfolio in this way can add tax, trading costs and potentially other fees. We like to keep your fees down, so we don’t recommend doing it more than once a year and, even then, only if it’s a change you expect to maintain for the foreseeable future.

 

What if I disagree with the criteria used?

MSCI criteria are robust and well respected. Nonetheless, we’d love to hear your feedback, please email us your thoughts.

 

Get Started

 

Written by Simon Moore

He was previously CIO of FutureAdvisor, a US digital advisor. His most recent book Digital Wealth, explains automated investing. He studied economics at Oxford, and completed his MBA at the Kellogg School of Management.

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