The Ethical Investment Spectrum
Ethical funds are often defined according to their "greeness", or shade of green, depending on the strictness of the criteria they choose to apply. Dark green investors narrow their investment choice because of the strictness of their ethical criteria. They may only invest in funds which select companies which proactively work towards improving the environment and operate a vigorous screening process, avoiding companies which do not confirm to their rigorous requirements. Light green investors normally tend to be less restricted in their choice of investments, excluding less companies in their investment selection, usually by a process of negative screening.
Our ethical questionnaire can help you to consider not just your attitude to investment risk, but also your attitude to social and environmental issues which are important to you. This can then be matched with our "off the shelf" portfolios, or you can use our filtering system to reduce the funds which do not comply with your criteria. This can help you to create a well diversified investment portfolio which precisely matches both your attitude to risk and your ethical concerns.
Light Green Ethical Funds
Light green funds, are inclined to reflect the weightings in the wider investment markets, since fund managers have a less restrictive mandate. They may invest in larger companies, which tend to be inherently less volatile and hence risky. Light green funds can include investments in animal testing, pesticides and the fur trade, but usually exclude armaments, alcohol, tobacco, gambling, pornography or nuclear energy.
Medium Green Ethical Funds
Apply stricter criteria than light green, but may still allow some exposure to companies with poor workplace relations, or companies responsible for ozone depleting chemicals. Investments tend to be made in smaller companies, mainly UK, Europe and North America, with some investments in other markets.
Dark Green Ethical Funds
Dark green funds, on the other hand, apply strict ethical criteria. In addition to the exclusions applied in the light green funds, dark green funds with strict ethical screening may limit their performance by only investing in companies which actively seek to improve our environment or benefit the community.
Most fund managers running ethical and SRI funds will have a research team who assess and monitor the criteria and produce an approved list of companies from which investments can be selected. If companies fall foul of these guidelines, they can be removed from an Investment House's panel of qualifying ethical investments.
Historically, ethical funds have been classified as either "dark" or "light" green. Dark green funds automatically exclude all companies involved in tobacco, armaments, gambling, the fur trade and pornography. Often they also screen out companies who use child labour abroad or employ third parties who do so.
Oil companies can be excluded on the basis that they work with regimes characterised by widespread human rights abuses.
Lighter green funds utilise a "preference" strategy. Instead of excluding a sector, they invest in companies which adhere to various social, environmental and ethical criteria. This opens up companies in sectors which would be shunned by dark green funds. The classic dark green/ light green approach has been increasingly replaced by caused based stock picking. As environmental concerns have increased, companies which favour renewable energy resources and sustainable development are favoured.
Other causes include animal testing, environmental impact, equal opportunities, human rights, intensive farming, genetic engineering, nuclear power, sustainable timber and military involvement.
The additional auditing, due diligence and research undertaken by ethical fund managers can lead to better informed investment decisions.
The Investment House may carry out background research on the key environmental and social issues facing a company and the sector in which it operates, analysing the company's environmental and social performance. This will include third party research from relevant organisations including Non-Governmental Organisations, trade associations and brokers.
There are many ways that an Investment House can apply diligence when selecting which companies qualify for an ethical investment fund. Often, ethical fund managers use a mixed approach- entirely screening out certain sectors, favouring investment in companies with ethical practices and actively engaging with the board of companies on ethical issues.