What is ethical and sustainable investing?

What is ethical and sustainable investing?

Ethical and sustainable investing are the terms used to describe the practice of using one’s individual capital in order to make a positive contribution to society. You might also hear it called socially responsible investing or impact investing, but the terms are all used interchangeably.

Ethical and sustainable investments can cover almost any investment that is made with the intention of benefitting society in some way, whether this is from a point of view of religious beliefs, environmental impact, social change or political activism. It is important to note that the definition of what is ethical or sustainable can vary from individual to individual.

Ethical and sustainable investing enables individuals to have a positive impact on the future and make a profit at the same time. By no means does ethical investing negate the idea that investments should benefit the investor or trader, it simply means being more aware of the companies, indices or even commodities that they’re investing in.

There are a huge number of ways that you can invest or trade more ethically – whether this focusing on companies that are actively involved in social change, divesting from companies that are deemed to be harmful or just using a financial lens in order to examine a company.

What is divesting?

Divestment is the opposite of investment; it is the practice of removing your capital from a specific area. In terms of ethical investing, this would be the idea of closing any investments that do not match your values. Popular divestment strategies include boycotting companies involved in firearm production and sales, fossil fuels and alcohol. These are sometimes referred to as ‘sin stocks’, due to the negative impact their products can have.

What is a financial lens?

In trading and investing, a lens is the term used to describe the criteria an individual will judge their investment on. By using a rules-based approach to select stocks, you are choosing a company based on its day to day practices and management decisions. This is also known as positive screening or more specifically, a positive environmental, social and governance (ESG) screening.

For example, using a gender lens involves selecting companies who want to improve the gender equality in their business. There are a variety of lenses that can be applied, whether this is looking into racial diversity, treatment of animals, ethical production or carbon costs. All financial lenses mean is that you research the actions and internal behaviours of a company, rather than specifically what that company does. So, rather than divesting in a clothing company because it isn’t an entirely sustainable clothing company, you’d look at the company’s supply chain and assess whether it meets your values.

Megan Boxall from Investor’s Champion talks to IGTV about the trend toward ethical investing and screening for ESG issues. Boxall highlights the move amongst new investors, as well as those with a longer history of investing, to find sustainable companies that may be the drivers in the future.

To view the full interview, log in to the IG platform or create an account.

How can I make an ethical investment?

1. Open a share trading account to invest in ethical shares and ETFs
2. Open a live trading account to speculate on the price of ethical shares and ETFs

Investing in ethical shares and ETFs

Investing in ethical shares and exchange traded funds (ETFs) involves buying a security in the belief that it will increase in value, and you can sell it for a profit at a later date. Along with the physical shares in any of the ethical companies you decide to invest in, you’d receive shareholder rights and any dividends that are paid.

Gaining shareholder rights can be another way to have a more ethical impact, as you can use your voting rights to ensure that the company continues to be aligned with your social and environmental goals.

If you decide to invest, you’ll need to keep an eye out for any news that might adversely impact the price of the shares. This could be anything from political decisions surrounding the issue you focus your investment on or public support for the cause. Although you are interested in the long-term movement of the shares, it is still vital to have an understanding of the market.

Trading ethical shares and ETFs

Alternatively, you could speculate on the price of ethical shares and ETFs by trading CFDs. By using derivative products, such as these, you are trading the underlying asset without ever needing to take ownership of the security. This means that you can speculate on ethical or sustainable securities that are rising and falling in price.

Unlike investing, trading enables you to take advantage of sector decline as well as growth. So you can use CFDs to hedge against periods of potential downturn that might occur as a result of regulatory changes and news.

Learn more about hedging instruments and how to hedge your shares portfolio.

If you don’t feel ready to start trading on live markets, you can always practise your trading strategy using an IG demo account. You’ll get all the functionality of our live platform, but completely risk-free. This means that you can start opening and closing positions on ethical shares and ETFs, without having to risk any real capital.

Best ethical and sustainable ETFs to watch

An ethical or sustainable ETF is a basket of stocks that tracks the performance of companies that are positively contributing to society. Trading or investing in ETFs can be a great way to put capital toward a variety of different ethical and sustainable businesses, with just one position.

Although typically investors and traders who focus on ETFs are viewed as more passive – as the basket of stocks in an ETF is chosen by fund managers – there are ways to focus on ETFs with good ESG ratings.

We’ve taken a look at some of the largest ethical and sustainable ETFs available to invest in or trade on. In no particular order, these are:

1. iShares MSCI KLD 400 Social ETF
2. iShares MSCI Europe SRI UCITS ETF
3. iShares Dow Jones Global Sustainability Screened UCITS ETF
4. UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF

iShares MSCI KLD 400 Social ETF

The iShares MSCI KLD 400 Social ETF is the tracker fund for the Morgan Stanley Capital International KLD 400 Social Index, which provides exposure to companies with high ESG ratings. Launched in 1990, it is considered one of the first socially responsible investment indices.¹ The MSCI KLD 400 Social Index comprises of 400 companies, which can be large-, mid- and small-cap US companies, across a variety of sectors.

The tracker fund excludes any company that has a known negative social or environmental impact – so sin stocks, such as companies involved in alcohol, tobacco, military weapons, nuclear power and genetically modified organisms (GMOs), are excluded.

The index provides a useful overview of just how many sectors can be included in a sustainable ETF. As, although it prohibits sin stocks, it does provide exposure to some general industries, such as energy, materials and utilities, provided they meet the ethical standards of the index. The technology sector comprises a large section of the MSCI KLD 400 Social, which includes shares of Microsoft Corp, Google parent company Alphabet and Facebook.

Although the index has underperformed compared to the S&P 500, when compared to the MSCI USA Investable Market Index (IMI) – designed to track the performance of large-, mid- and small-cap segments of the US market – the sustainable index has outperformed. For example, the annual performance for the MSCI KLD 400 Social Index in 2018 was -3.50%, compared to the MSCI USA IMI’s performance of -5.20%.²

iShares MSCI Europe SRI UCITS ETF

The iShares Europe Sustainability SRI tracks the performance of European companies that are perceived to be leaders of sustainability. Each company is ranked in terms of their ESG characteristics, and then compared to other companies in their field.²

The ETF was launched in 2011 and has seen a cumulative return of 76.20% between its inception and July 2019 – this includes dividends and any interest payments.

The largest sector included in the ETF is financials, which make up 15.97% of the fund. This includes companies such as Allianz, AXA and Deutsche Boerse. Also included in the ETF are some household names such as Unilever, Loreal and Danone, due to its large focus on consumer staples.

iShares Dow Jones Global Sustainability Screened UCITS ETF

The iShares Dow Jones Global Sustainability Screened UCITS ETF tracks a range of global companies that are involved in sustainable business. Each company included in the basket of stocks have been screened for their economic, environmental and social characteristics. This means that the ETF excludes any companies that are involved in industries like weapons manufacturing and adult entertainment.

The fund was created in 2011 and has seen a total return of 66.25% between its inception and July 2019 – this includes dividends and any interest payments.

The exposure breakdown of the iShares Dow Jones Global Sustainability Screened UCITS ETF gives a higher weight to information technology companies than any other sector – comprising of 24.96%.

UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF

If you’re specifically interested in UK investments, the UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF holds the shares of 162 companies listed on the London Stock Exchange that are considered socially or environmentally responsible.

The ETF tracks the MSCI United Kingdom IMI Socially Responsible index, and so the weighting of each stock in the ETF directly corresponds to its weighting on the underlying index.

As with some of the other ETFs on this list, it might surprise you that although sin stocks are not included, large non-renewable energy companies and mining firms are – including BP and National Grid. Although many of these firms could still be considered unethical by many other benchmarks, the companies included in this index have been measured using the ESG metric. This means the companies could be considered ethical due to their gender and diversity practices, rather than environmental policy.

Best ethical and sustainable stocks to watch

We’ve taken a look at four stocks to watch across various different sectors to demonstrate the range of choice in ethical and sustainable investments. In no particular order, these are:

1. Brookfield Renewable Partners LP
2. Sunpower Corp
3. Nucor
4. Goldman Sachs

It is important to remember, if you trade shares, you can profit whether the underlying market price rises or falls. The best stock to watch for traders doesn’t have to be a company expected to succeed, as they can also take short positions if a share is experiencing volatility or sustained decline.

Brookfield Renewable Partners LP

Brookfield Renewable Partners (BEP) promotes itself as one of the largest publicly-traded renewable power platforms.³ It is owned by parent company Brookfield, which is an asset management firm that invests in businesses that are vital to the modern economy. The group holds a number of companies, including Brookfield Property Partner and Brookfield Infrastructure Partners.

The renewable energy section of the company is widely regarded as a sustainable empire. Hydroelectric energy companies make up 75% of the company’s portfolio, alongside investments in wind, solar and storage facilities.

The benefits of looking at companies like Brookfield Renewable Partners is that they are diversified across different sectors. This means you’re gaining exposure to multiple different opportunities with one position. However, it does mean that there may be a lot more factors that can impact the price of the shares.

The company has seen significant market interest within 2019 alone, rising from $26.33 on 2 January to $37.43 on 2 September. Although this increase in price can be seen as a positive sign for the company, its worth noting that the high price might deter investors.

SunPower Corp

SunPower Corp (SPWR) is an energy company that designs and manufactures solar panels and renewable energy solutions for homes, businesses and utilities.

The Silicon Valley company has been a favourite in the solar sector due to its innovation and global reach. However, SunPower Corp is also considered an ethical and sustainable stock for its internal practices. The company philosophy is based on ensuring its solar panels are useful throughout their lifecycle – with sustainable sourcing and manufacturing, and the ability to be recycled rather than put in landfill.

Shares of SunPower increased in value by 115.1% in the first six months of 2019, largely on the back of an improving outlook for the entire sector. However, the stock has fluctuated amid pressures from competition within the market and reduced revenue due to lowering prices of solar panels. SPWR shares fell from their all-time high of $16.03 on 1 August 2019 to $12.31 by the end of the month.

Nucor

Nucor Corporation (NUE) is the largest American steel producer. This might seem like an odd choice for an ethical and sustainable stock, as many metal producers aren’t known for environmentally friendly choices, being one of the most energy-intensive industries. However Nucor is making strides in this area.

Nucor uses flexible electric arc mini mills which are leading the industry in terms of clean energy and are expected to cut carbon emissions by 11.7 billion tons a year. The company also has a completely solar-powered manufacturing site in California.

This focus on the environment and innovation has really helped Nucor with investors and presented the company as not just a steel company but a global leader in recycling and technology. However, its reputation is based on its flexible nature – the company has solid fundamentals which means it should be in a good position to adapt to the future.

At the moment Nucor still faces challenges, which have caused huge fluctuations in the company’s stock in 2019 – from a high of $62.30 in January to a low of $47.28 in August. The main one being global overcapacity caused by China’s steel production industry. The impact of China’s cheap products flooding the market has been damaging to US steel companies and the US-China trade war has only worsened the situation for steel makers.

Goldman Sachs

Goldman Sachs is just one example of a stock that can be selected under positive screening or lens investing. The company announced in March 2019 that it would be making a policy change that would reinvent how the company hires its staff. It stated that going forward 50% of its junior bankers, analysts and entry-level positions must be women, 11% must be black and 14% must be Latino.

Socially, the reasons behind this decision are evident but many believe it makes financial sense too. This is based on the premise that diversity within a board can be used to secure higher company returns and lower stock price volatility, as diverse boards tend to have less risky financial policies and increased innovation.⁴

Although the impact of this decision have yet to weigh in on the stock valuation, it is a notable trend for the future.

Why are people interested in ethical investments?

Sustainable investing is just another way that people are trying to have an influence on the future of society – it is no different from recycling, buying fair-trade goods or volunteering. Although investors and traders still want to make money, there are great ways to do so while having a positive impact.

The interest in ethical investing is nothing new, the earliest recorded socially responsible investment strategy was in the 18^th century when Quakers were discouraged from investing in the slave trade. However, in its modern form, sustainable investments have increased in popularity over the last five years.

What sectors can I invest in sustainably?

We’ve taken a broad look at some of the sectors you might want to consider for your ethical and sustainable investments. These include:

Solar

Analysts expect big things from the solar power sector, which includes the companies that produce the materials for solar panels, as well as those that construct and market the product.

The second quarter Solar Market Insight Report for 2019 showed that installations of the technology is up by 10% in the US from just one year ago. By the end of the year, they expect this figure to be around 25% from the previous year.⁵ If these industry trends do occur, the companies in the sector could see increased market interest and revenues.

Wind turbines

The increased use of renewable energy in general has boosted the wind turbine industry’s size, with new research and development of wind farms. The wind turbine market is predicted to be worth more than $70 billion by 2024, up from $50 billion in 2017.⁶

Companies within the industry, such as manufacturers, will benefit from the increased demand but could suffer as the competitive market drives component prices down.

Hydroelectric

Hydropower is one of the oldest sources of energy, dating back to before steam power and electricity, when humans would use moving water to power wood and textile mills. Modern hydropower, or hydroelectricity, uses moving water to power turbines that generate electricity. As recently as 1950, it accounted for 30% of US electricity generation, before falling to 6%. Today, it is the largest source of renewable energy in the world and is most prominent in China.

Traditionally the source is reliant on dams, which have been criticised as damaging the natural landscape. However, as technology improves, the sector has found ways to run off of the natural flow of rivers and smaller turbine generators.

Increasing interest in renewables is likely to help the hydroelectric sector grow in use, leading to more efficient technology and financial savings.

Wave and tidal

Wave and tidal energy is the industry that uses the ocean surface waves to generate electricity and pump water into reservoirs. The technology in the wave and tidal sector is promising, but is less developed than the devices found in previous two industries. This means the sector often goes unnoticed in favour of the larger solar and wind sectors; however, its potential is enormous. The wave and tidal energy market is expected to reach $2.9 billion by 2024, up from $281 million in 2017. This is a growth rate of 40.08% per year between 2018 and 2024.⁷

With the increasing reliance on renewable energy, it will be interesting to see how companies in this sector progress and compare to other sectors.

Veganism

Demand for plant-based alternatives has grown rapidly in the last decade and is only predicted to continue on its upward trajectory. A report by Barclays suggested that the vegan agribusiness sector could reach $140 billion in sales during the next decade alone.⁸

The agribusiness industry is talking about the plant-based craze as the future of food. In fact, Cargill Inc – a large agricultural company – has invested $75 million in Puris, a pea protein production firm involved in creating meat substitutes.

Find out more about vegan investing

Ethical and sustainable investing summed up

• Ethical and sustainable investing are the terms used to describe the practice of using one’s individual capital in order to make a positive contribution to society
• Ethical investing can include religious beliefs, environmental impact, social change or political activism
• Ethical investments should be opened with the aim to gain a profit
• You can either open a share trading account to invest in ethical shares and ETFs or open a live trading account to speculate on their price
• You can choose to focus on ETFs, which track a basket of stocks, or the shares of individual companies
• The interest in ethical investing is nothing new, the earliest recorded socially responsible investment strategy was in the 18^th century
• There are a range of sectors that investors can focus on, including wind, solar, hydroelectric and veganism

1. MSCI, 2019
2. iShares, 2019
3. Brookfield Renewable Partners, 2019
4. Bernile, Bhagwat and Yonker, 2016
5. Solar Market Insight Report, 2019
6. Cision, 2019
7. ZionMarketResearch, 2017
8. Barclays, 2019