Have you ever considered the impact your investment portfolio is having on wider social, political and environmental issues?

Like many, you may have made your investment based purely on the prospects of return. However, unwittingly you could be investing in companies or funds concerned with activities which are contrary to your personal views, for example a tobacco company, one with a poor environmental record, or even one that uses child labour. An increasingly popular way to address this is ethical investment, or Socially Responsible Investment (SRI). This can offer greater control over these matters in line with your personal views whilst achieving comparable returns with other portfolios.

Broadly speaking there are three main approaches to ethical investment:

Negative Screening

This is the most common form of ethical investment and would involve your fund manager avoiding investing in certain companies or industries in line with your wishes. You can set the parameters within which your fund manager is to invest e.g. exclusion of a particular company entirely, or when 5% of a company’s turnover is represented by a certain activity.

However, due to the diverse activities of some companies and their subsidiaries, it may be difficult to totally exclude a company or sector using negative screening. This is more likely to be achieved through the two following proactive approaches.

Positive Screening

This involves an active decision to invest in those companies with a commitment to certain social, ethical or environmental standards. This could involve focussing on one particular sector such as renewable energy or include a range of areas, for example community involvement or ethical supply chain management.

Your fund manger would then select the companies to invest in based on the criteria you have set them.

Dialogue and Engagement

This approach goes a step further than positive screening in that it involves dialogue with a company and use of your power as a shareholder to encourage more ethical business practices. You could do this in an overt manner by exercising your vote at shareholder meetings to press for change or in a more covert manner – for example, your fund manager, as the institutional shareholder, could have discussions with the management board on your behalf on matters such as carbon emissions control or poor employment practices.

The above approaches are often not taken in isolation with fund managers using a combination of the three. Ultimately the balance of the approach taken will be weighted to best suit your views.

Beyond investment portfolios there are also many other ethical investment opportunities in the market today including pension plans, life cover, bank accounts and general insurance.