Ethical Investing: How to Research and Start Investing | This post is not Financial Advice.
A lot of people on their journey to financial independence select an investment after reading about it in a book or on a blog.
In some cases, this might not be the right product for them.
If investing through the stock market is your chosen lever for financial independence, then the approach should be more intentional.
The aim is to buy a diversified investment product and then hold it until retirement where it becomes part of the drawdown strategy.
That means you need a lot of faith in the product you select, particularly as equities rise and fall as we go through bull and bear markets on a regular basis.
When the price of the investment falls heavily (and it will be a when not an if) then you will have doubts.
You will immediately start to think about selling that investment.
If you bought the product based on someone else’s recommendation…
…or because everyone else seemed to be doing it and you didn’t want to miss out…
…then there will be a greater chance of you selling it at a low price when the economy is in panic mode.
However, if you undertook your own research you will have more faith in your convictions and you will be more likely to ride out the storm.
A typical investment product would be one that invests in the world’s largest companies and the top 10 holdings would look like this:-
If that sounds great to you then find the lowest cost worldwide tracker and buy it.
But what if you wanted to dig a bit deeper and specifically what if you wanted to invest more ethically and avoid arms manufacturers, tobacco and gambling companies?
Ethical investing can be done in two ways.
- Screen out companies with certain characteristics.
- Look at the activities of a company and select those companies which best fit ethical criteria.
Acronyms used in ethical investing to look for in the product name include:-
SRI – Socially Responsible Investing
ESG – Environmental, Social & Governance
You could try your broker’s website as a starting point but most don’t have enough filters to zoom in quickly on the type of product.
If you are a fan of ETFs go to JustETF.com then select the equity button on the left, select equity strategy and then social / environmental.
Then I filter on fund size >£100m as larger funds are more liquid (easier to trade).
Then select world under the Region category as that will give me better diversification.
The results are here and they look like this:
I have sorted by currency as I don’t want a Euro denominated ETFs as that is not a currency I want exposure to.
As commodities like oil and gold are denominated in US Dollars I am happy with USD exposure.
I will ignore iShares global water as it is too niche to consider.
Selecting row 1 iShares global sustainability I get the following as the investment strategy:-
The Dow Jones Sustainability World Enlarged Index ex Alcohol, Tobacco, Gambling, Armaments & Firearms and Adult Entertainment index tracks 20% of the largest 2500 global sustainability companies of the Dow Jones Global Total Stock Market Index.
I learn that the share price is in GBP which means I don’t get charged exchange rate fees when I buy and sell.
In addition, I learn that the price is near its 52 week high, which I like as it shows the ETF has some momentum behind its price.
Fees are 0.6% which are high and volatility (how the price fluctuates up and down) is 13% which is slightly above average.
The ETF is accumulating which means that any dividends received are re-invested automatically in the fund.
This is good for people who aren’t retired and have other income streams.
There are some documents I can download.
I select the factsheet as it is updated monthly and it is a good summary of the ETF. In this document I find the following:-
It’s not bad but it is an absence of arms manufactures etc rather than representing the most ethical large-cap companies.
Next, I look at UBS World Socially Responsible.
I will choose the variant with the lower fees (0.25%) as I prefer lower fees over the possibility of better performance from the hedged variant.
This fund has a strategy of:-
The MSCI World SRI 5% Capped index tracks global equity market performance considering only companies with high Environmental, Social and Governance (ESG) ratings relative to their sector peers, to ensure the inclusion of the best of class companies from an ESG perspective.
The weight of each company is capped to 5%.
Pricing is in GBP and the ETF is near its 52 week high.
Fees are reasonable at 0.25%.
Volatility is 13.6% which again is slightly above average but within my tolerance levels.
The fund is distributing which means I will get dividends that I need to re-invest manually.
This isn’t ideal but it’s not too much of an issue for me.
The factsheet tells me:-
The top holding is capped at 5% so this fund has less Microsoft than the iShares fund.
UBS has more exposure to the US and to the financial services sector.
Comparing the fund performance UBS marginally beats iShares (1-year performance), although over 5 years, iShares performs better.
There is also a good trend as the prices start in the lower left of the screen and finish in the upper right.
I finally go to the Morningstar website and check the star rating of both ETFs.
This rating looks at how well the ETF tracks its underlying index, adjusted for any volatility factors.
UBS rates 5 Star whereas iShares only gets 3 Star.
i-Shares has more exposure to information technology which has performed well in the last 3 years.
So I would have expected it to outperform UBS and this possibly explains the 3-star rating.
You can view the Morningstar rating for i-Shares here
So on balance, I would choose UBS socially responsible which has a ticker UC44.
For Open Ended Investment Companies (OEIC) (i.e. Index Funds) the research principles are the same but there are more choices.
I looked at the Morningstar OEIC screener and I selected 5-star rated funds.
Then, broad category as equity, Morningstar category as Global Large-Cap Blend Equity, fund of funds as No, OCF less than 1% and Max initial sales charge as zero.
This gave me AXA World Funds – Global Factors – Sustainable Equity I Capitalisation as one of the funds for consideration.
I couldn’t find an OEIC category for ethical investing but I did find an article from August 2019
From that article, I picked Liontrust Sustainable Future Absolute Growth Fund Class 2 Net Accumulation. Morningstar link here.
It has no upfront fee (which is essential) the OCF is 0.93% which is high compared to ETFs but the fund is more than a simple index tracker.
It has a 5-star rating by Morningstar some summary information from the Morningstar website is:-
I used the Trustnet website to compare the UBS ETF with the Liontrust fund and the S&P500. The results are below:-
Over a 1-year period:
The ethical funds beat the S&P 500 index. i.e. 13.8% and 18.4% are greater than the 13.0% of the S&P 500.
Over a 5-year period:
The S&P 500 wins. 83.6% from the S&P 500 exceeds the 80.3% from Liontrust Sustainable and 63.1% from the UBS ETF.
Also, my ETF was beaten by the OEIC.
Past out-performance doesn’t guarantee future out-performance.
I was surprised that an index with “old economy” stocks like oil & gas and tobacco companies won the day.
Hopefully, this has shown you a way to research both OEICs and ETFs.
In addition, it has shown you a possible selection methodology based on fees, price performance, volatility and market exposure.
What To Read Next>>
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- Investment Asset Classes: Pros and Cons
Many thanks to Ian Shadrack for this contribution on how to research ETFs using ethical investing as an example. You can learn more about him by visiting UK ETF Investor.
Have you explored Ethical Investing? or is this something that you've considered in the past and struggled to find the right information?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.