Your questions answered – Ethical investing: Doing more with your money

Your questions answered: Ethical investing: Doing more with your money

During our recent ethical investing webinar, we had some brilliant questions, so we thought we would share some of the highlights to help demystify ethical investing.

The host of this session was our financial planner, Krupesh Kotecha, who has a vast wealth of knowledge surrounding ethical investing. Krupesh is part of our investment research team at Balance and has spent a lot of time researching the best ethical investment solutions to suit our clients.

Ethical investing starter kit

Whether you’re new to ethical investing or have dipped your toe in the water previously; before we jump right in with the questions, here’s a selection of our most recent blogs on ethical investing:

“How can we be sure of ‘ethical’ funds and their detailed policies?”

Q – When thinking of ethical investing, we tend to think of main environmental, ecological, health and welfare issues. Including smoking, arms production and the like. Does the category also include any of the financial engineering models which would appear to be equally unethical? Thinking particularly about some of the practises, which may or may not occur in hedge fund* activities with the 5 and 20 remuneration levels**? How can we be sure of ‘ethical’ funds and their detailed policies?

* Hedge funds are closed investment vehicles where you are giving your money to a hedge fund manager.

** The 5 and 20 remuneration model is a model where to invest in a specific hedge fund, you have an entry fee of 5% of your investment, and then they charge a performance fee of 20%.

A – First of all, when you speak to financial planners like us, we tend to only look at regulated investment products and services. It has to be regulated in the UK by the Financial Conduct Authority (FCA). And we like to keep things simple here, so we would not use complicated things like hedge funds in our planning because most clients have no need for these things in the context of their financial planning.

Regarding financial planning, you should be asking questions like, what are the remuneration models like at the fund houses? How are they renumerating their staff? Here at Balance, all staff get paid a salary, and if we can pay a bonus out every year is dependent on how the business does across various measures, not just profitability. Other companies may take a different belief, but we want to set the culture right from the outset.

So when you look at things like hedge funds and fund managers, you have to think about the governance practices and their culture and see if they apply decency limits and caps on their fees.

“What rating services might I look at?”

Q – What rating services might I look at to get some idea about specific funds recommended to me?

A – If you haven’t got a financial planner, we could do that kind of work for you. And if you already work with us, we can happily look at what’s going on with those investment funds. Otherwise, Morningstar has some good resources. You can type your fund code into the Morningstar search bar, and then they’ll produce a sustainability section. It’s very technical and designed for people that look at this thing more regularly and more within the financial services sector. But it will give you an idea of the sustainability of that fund.

If you’re a direct consumer investor not investing through an advisor, companies like Interactive Investor or AJ Bell will allow you to invest in investment funds from across the market. Similar to what we have access to as advisors. If you look there, you’ll find different funds have a score or ESG (environmental, social and governance) rating. But, you need to understand the way it’s rated, who’s rating it and how they’re rating it.

The other way is to get the fund factsheet itself. To look for the fund factsheet from the fund provider and see what information they provide. No doubt, if they are big on the ESG work that they’re doing, they will be shouting about that. If they don’t tell you anything, then it’s either a non-ethical fund or the ethical score is low. So bear that in mind.

“Does ethical investing make a difference?”

Q – Does ethical investing make a difference when you’re investing in the perfect market*?

* The perfect market is a theoretical market where sellers can compete fairly, and sellers and buyers have complete information.

A – If we think about a traditional non-ethical investment portfolio, well, what is that? In a nutshell, when you’re investing like that, what you’re doing is you’re investing your money globally, typically across global equities. So we’re talking about individual companies across the world listed on stock markets, and potentially, global bonds. And that’s how a traditional portfolio gets constructed.

Now, what will happen in my view is, as these ESG areas become more public with more money allocated to them, we’ll start to find that the companies that do well financially and attract investment in will be the companies that genuinely do good. Naturally, that perfect market will be companies that are always going to do well. And yes, that’s an ideal scenario. That means getting rid of things like arms and so on, and is that ever going to go away? Probably not. But you may find in that global makeup that those companies have less allocation now because they’ve attracted less money they become smaller businesses in that global picture. So I would say that it will make a difference. Whether the market is perfect or not, it will start to get better.

“Are there any government incentives for ethical investments?”

Q – Are there any government incentives for ethical investments?

A – There is a specific government incentive structure known as Social Investment Tax-Relief (SITR). Income tax relief of up to 30% available of the amount invested, capital gains tax-free disposal and hold-over relief available

When we talk about impact investing, there’s an area of investment where you can invest capital specifically targeted to specific themes and areas.

One of the best things about that type of investment is that you can meet the businesses because it can target the area where you live. You can go and meet these businesses and see the difference they are making.

In terms of other incentives to ethical investments, we think the government will start looking at these sorts of things as time goes on. But it’s a case of watch this space!

If you’d like to view the full webinar recording, you can watch it online here.

And if you have any questions about the topics raised in this article or would like to discuss your finances or an existing financial plan, please get in touch with us and speak to one of our financial planners.