Demand for ethical investment – or socially responsible investment (SRI) – appears to be on the rise, with a growing number of people looking to build a portfolio that is based on more than just profit margins.
Recent figures from Aviva, published in the Financial Times Adviser, showed that approximately half of consumers take ethical issues very seriously when purchasing products.
60 per cent of people feel it's possible to get good returns while investing responsibly.
Yet, a separate Aviva survey revealed that 81 per cent of financial advisers believe less than one in 10 of their clients have a genuine interest in ethical investing.
Clearly, there is a disconnect between clients and their advisers about the important issues at the heart of investment decisions. But what are the pros and cons of investing ethically?
Let's take a closer look at the factors socially responsible investors must consider.
Choosing investments that offer environmental or social benefits has a number of benefits, including:
Feel-good factor: Perhaps the most obvious advantage of SRI is the positive feelings you will have when an ethical holding performs well. If a company shares your values and delivers socially responsible projects, you could benefit both financially and emotionally from your investment.
Future profit potential: People are becoming more ethically driven in their purchases, which means socially responsible firms are likely to see improved profits as consumer behaviour shifts. In fact, Nielsen statistics found that nearly three-quarters of millennials would pay a surcharge for sustainable goods and services.
Catalyst for change: As investors begin backing more socially responsible companies and projects, other businesses will strive to improve their ethical practices to attract funding. Over time, organisations will move towards more sustainability, which can only be good for the environment and other important social causes.
Despite the above advantages, ethical investors must take a number of other factors into consideration:
Time and research: SRI isn't a passive strategy, and you often have to spend time researching potential investments thoroughly to ensure they align with your values. This can become quite complex if every investment in your portfolio must meet certain benchmarks.
Not often an optimal strategy: It's unlikely that an SRI strategy will provide optimal returns, so you could be sacrificing financial gains by embarking on an ethical approach. Some people prefer to pursue conventional investment strategies and instead donate a certain proportion of their profits to charitable causes.
Higher fees: The fees attached to SRI can be higher due to the additional research required to find the right investments for your particular belief systems. This can eat into your portfolio's profits, especially if your investments aren't performing as well as traditional strategies.
These are just some of the issues that investors must weigh up when deciding on whether or not to pursue SRI strategies, and more people are beginning to look favourably upon investments for the greater good.
"Most IFAs don't believe their client want this, but they don't necessarily ask their clients."
A 2016 poll from the UK Sustainable Investment and Finance Association found that 60 per cent of people feel it's possible to get good returns while investing responsibly.
Meanwhile, 43 per cent said they want their investments to have at least some thought towards 'making a positive difference to the world'.
Robin Keyte, director of Keyte Chartered Financial Planners, told the Financial Times Adviser that professionals within the investment industry could be doing more to educate clients regarding SRI.
"Most IFAs don't believe their client want this, but they don't necessarily ask their clients. And from the client's perspective, they aren't aware that ethical products are available," he explained.
Ethical investing may not be the right choice for everyone, but with the right approach and guidance it can provide a more fulfilling strategy who want their portfolios to better reflect their social and moral beliefs.