Ethical Investing for High Net-Worth Individuals

Ethical investing is on the rise, driven by heightened public awareness of social and environmental issues and investors' growing desire to align their investments with their values.

Ethical investing strategies consider environmental sustainability, social responsibility, and corporate governance, the three pillars of ESG.

According to Morgan Stanley, “more than three quarters (77%) of individual investors globally say they are interested in investing in companies or funds that aim to achieve market-rate financial returns while also considering positive social and/or environmental impact.”

More than half of investors say they plan to increase sustainable investments in the next 12 months.

Source and image credit: Sustainable Investment Interest on the Rise in 2024 | Morgan Stanley

What are the main types of Ethical Investing?

These types of ethical investing are not mutually exclusive, and investors often combine different approaches to align their investment strategies with their ethical values and financial goals.

ESG investing

ESG investing considers environmental, social, and governance factors (ESG) while focusing on financial returns on investment. The strategy aims to invest in companies prioritising sustainability, ethical practices, and responsible governance.  

• This could be investing in companies that positively impact climate change, resource consumption, pollution, and biodiversity.
• It may also include investing in companies with notably strong relationships with employees and customers.
• Ethical investors may wish to avoid companies involved in industries perceived as harmful or morally questionable, such as tobacco, alcohol, gambling, firearms, and fossil fuels.
• They may also avoid companies that violate specific ethical standards, such as labour rights or environmental regulations, may also be excluded from ethical investment portfolios.

Impact investing

While traditional investing primarily focuses on financial returns, impact investors seek investments that will positively change society or the environment. These could be anything from improving access to healthcare or education to reducing carbon emissions or promoting sustainable agriculture.

Can ethical investing reduce risk?

Ethical investments aim to prioritise companies with strong governance and a track record of sustainable business practices.

These practices can potentially mitigate certain risk factors. For example:

• These companies may see better long-term performance and growth potential due to their commitment to strong ESG and sustainability.
• For example, companies with strong environmental practices may be less likely to come under regulatory or legal pressure.
• Additionally, consumers increasingly show greater awareness of, and preference for, products and services from companies prioritising sustainability and social responsibility. This can lead to increased market share and higher profitability for ethical investments.

Like any investment, ethical investments can still experience fluctuations in value and, while certain risk factors may be reduced, ethical investing does not remove risk.

Are there disadvantages to ethical investing?

Ethical investing offers many potential benefits; however, it is important to consider the full picture, which includes some potential downsides that all investors should be aware of.

• By excluding certain industries or companies, ethical investing can restrict the range of investment opportunities available.
• There may be higher fees associated with ethical investment funds due to increased research and due diligence required.
• There is no guarantee that ethical investments will outperform other investment funds.
• Different organisations may have varying criteria for what constitutes an ethical investment. This can make it difficult to compare and evaluate different ethical funds.
• Some companies may exaggerate their ethical credentials, making it important to conduct due diligence. This is known as “greenwashing”.

Ethical investing is not a silver bullet and is not a guaranteed path to financial success. It's essential to be realistic about its potential and to consider it as part of a diversified investment strategy.

Investing involves risks, and past performance is not indicative of future results. Before making any investment decisions, it is essential to consult with a qualified financial advisor who can provide guidance based on your individual circumstances.  

Why independent financial advice is important for ethical investors

An independent financial adviser can help high-net-worth individuals choose ethical investment plans that satisfy their unique personal requirements and goals.

At Shorts, we assess your financial goals, risk tolerance, and values. This information helps us identify ethical investment options that align with your preferences. We will then research various ethical fund options and advise on a diversified portfolio to meet your ethical requirements, investment goals, and risk tolerance.

To manage risk, we recommend a diversified portfolio of ethical investments. This may include a mix of stocks, bonds, and other asset classes. As part of our ongoing advice service, we will hold annual meetings to analyse the portfolio's performance and reassess its suitability for your needs.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed, and you may get back less than you originally invested.