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Ethical Investing Starter for 10: What counts as 'ethical'?

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Investment adviser 7IM recently highlighted the five main areas of ethical investment. Most options available to investors will fall into one of these five categories:

ESG – Environmental, Social & Governance

‘Environmental’ criteria are used to gauge the impact of the firm’s operations on the environment. Social criteria are wide-reaching, but include sensitivity towards the communities in which the business operates, from human rights to responsible employment practices. Governance criteria refer to company best practice, such as its internal controls, leadership, executive pay and shareholder rights.

SRI – Socially Responsible Investing

Those who invest on an SRI basis will exclude companies involved in unacceptable business areas – usually the old baddies of porn, tobacco, alcohol, weapons and polluters. The approach also actively seeks out companies who are engaged in positive social policies. Each fund group will have their own definition of what constitutes ‘socially responsible’ – so remember that one man’s ‘sin stock’ is another man’s great night out.

SDGs – Sustainable Development Goals

These are a collection of 17 goals set by the United Nations in September 2015. Each goal has specific targets to be achieved over the next 15 years. 7IM provides these handy logos here:

Impact Investing

As the name suggests, rather than simply avoiding those companies doing something bad, these investments target companies that are actively doing something good. They will seek out companies have a positive impact on society – recycling, educating, reducing poverty and so on.

Green Bonds

These are tax efficient bonds that companies issue to finance sustainable projects. 7IM says: “If a company is undertaking a project aimed at energy efficiency, for example, it has access to a cheaper source of financing. The aim is to make such projects more attractive for companies to undertake.”

Robo advisers

New UK entrant Wealthsimple offers a socially responsible portfolio and start-up Moo.la has also launched an ethical portfolio. Wealthsimple’s SRI portfolio invests in a range of global SRI funds. The Moo.la product uses the same investment processes behind the group’s existing service, adding in ethical investment screening and the use of green bonds.

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