Ethical Investments for a better future

Learn more about our Ethical Plans

What is ethical investing?

Ethical Investing aims to exclude profiting from activities that are considered harmful to society and the environment and invest in organisations companies and projects that are committed to operating in a way that is sustainable for the future.

This is typically done by filtering out harmful activities (negative screening) and proactively seeking to invest in companies that are committed to making a positive impact through their environmental, social and governance (ESG) practices (positive screening).

Negative screening: most ethical funds will screen the so-called ‘sin stocks’ such as tobacco, gambling, weapons and adult entertainment. Other issues screened might include animal testing, intensive farming, nuclear power, genetic engineering, deforestation, and poor human or labour rights. The activities screened and the screening criteria used vary between fund providers.

Positive screening: aims to identify those companies demonstrating or showing commitment to achieve the highest standards of practise in the areas of environmental impact, social justice and corporate ethics. Only organisations that score highly across these three areas will be eligible to receive investors’ money.

Wealthify’s ethical plans combine negative screening with proactive selection based on ESG scores as well as consideration of other factors that contribute to a commitment to future sustainability.

Ethical investing is one of a number of terms used to identify sustainable approaches to investing. Others include: Environmental, Social and Governance (ESG), Sustainable investing and Impact investing. Find out more about these below.

How does the ethical screening process work?

Fund providers will typically exercise two levels of screening:

Negative screening: aiming to exclude companies involved in activities that are at odds with ethical and socially responsible values. This typically means ‘sin stocks’ such as gambling, tobacco, adult entertainment and weapons, although most funds screen many more activities besides.

Positive screening: actively seeking and investing in companies that demonstrate excellent environmental, social and governance (ESG) practices. More about what this means can be found in What is ESG, sustainable and Impact investing? Fund providers will employ a scoring system to each company, rating it against a set of predefined criteria, such as energy efficiency, equality agenda and the quality of its corporate governance, looking at, for example, whether it has been fined in the past for regulatory violations. These all add up to an ESG rating, which determines whether a company should be considered for investment.

Improving companies: ethical funds don’t just invest in companies with the highest ESG ratings. They will also identify and invest in ‘improving companies’ – i.e. those that show significant commitment to improving their environmental, social and governance practices. An example might be a coal company that is investing a significant part of its profits in the research and development of green energy.

What do your ethical funds exclude?

Each fund provider will negatively screen (i.e. exclude) companies involved in certain sectors and activities. Typically, these will be ‘sin sectors’ such as gambling, tobacco, adult entertainment and weapons. The full list of sectors considered can be much wider, as shown below.

The exclusion criteria also vary between providers: some funds will completely exclude a company profiting from harmful activities (e.g. tobacco) whilst others may invest in the company, provided it earns no more than 10% of its overall profits from the activity in question. This 10% tolerance allows a small degree of flexibility to account for instances where a company isn’t directly involved, but could be exposed to a harmful activity via, for example, a parent company or supplier. Fund managers argue that earnings of less than 10% demonstrates there’s effectively no significant involvement in that activity and an investment in the company is justifiable.

A 10% tolerance is applied to the screening of some activities by the fund providers we use. Therefore, we can never guarantee that our plans will not contain some degree of exposure to any of the harmful activities listed.

Our ethical funds aim to exclude the following, subject to an up to 10% tolerance:

Weapons; gambling; animal testing; deforestation; nuclear power; climate change; oppressive regimes; adult entertainment; tobacco; excessive political donations; human rights issues; intensive farming; unfair labour practises; genetic engineering.

 

Will performance be lower with an ethical portfolio?

Returns are not guaranteed with any form of investing and you could get back less than you put in.

With all types of investing, cost affects your performance, as the more you pay in fees and charges, the fewer returns you get to keep. The overall cost of investing in an ethical plan is higher than that of a standard plan and therefore, investing in an ethical plan may affect performance and your returns could be lower than a standard investment plan with an equivalent investment style. Ethical funds aim to avoid investing in certain sectors, like tobacco or gambling, which could also affect your plan performance.

You can get some idea of how ethical investments perform against their standard counterparts by comparing market indices like the FTSE for Good against the FTSE All Share. Of course, past performance is not a reliable indicator of future performance.

Why are your ethical plans more expensive?

We’re using active (rather than passive) ethical funds in our plans which are a little more expensive [average 0.54% per year] than the passive funds we use in standard Plans [average 0.21% per year]. The extra cost reflects the fact that active funds are proactively and comprehensively managed to ensure the investments retain appropriate ethical standards. We think this is a robust way to manage our ethical investment plans, as it allows for a qualitative and common-sense approach to selecting and monitoring sustainable investments.

However, our annual management fee for ethical plans is the same as standard plans and transaction costs (also known as ‘spread costs’) will typically be lower, at an average 0.03% per year.

To find out even more about the individual Ethical Plans download our fund factsheets.