The amount of assets that are invested whilst considering the impact it will have has increased. More investors than ever before are taking ESG (environmental, social and governance) factors into consideration to align their portfolio with their values. But what investment strategies are there that allow you to reflect this?

The 5^th – 11^th October marked Good Money Week, an awareness week that aims to showcase the sustainable and ethical options when it comes to banking, pension, savings and investments. If ethical investing is something you’ve been thinking about and you want to incorporate your values into financial decisions, now could be the perfect time to do so.

Choosing investments for reasons other than financial gain has been a trend that’s gradually gaining traction. Of course, this doesn’t mean that you disregard returns, it’s about taking multiple factors into account. As a result, ethical investing is sometimes referred to as having a ‘double bottom line’; the return it delivers to you and the positive benefit.

According to research:

• Just three in ten men with investments only care if they make money, this figure drops to 15% for women
• However, there is a lack of awareness, just 69% said they had no idea they can request investments that have a ‘positive social impact’

So, if you do want to invest with ethics in mind, what are your options? There are three key strategies to be aware of:

1. Negative screening

When people talk about ethical investing, this is often the first strategy that springs to mind. It involves divesting and avoiding investing in companies that don’t align with your values.

For example, if you’re seeking to ensure your portfolio has a positive impact on climate change efforts, you may decide to no longer want to invest in companies with activities in fossil fuels. Alternatively, if human rights are a key concern, you may decide to avoid retailers that have exploitative practices within their supply chain.

When you see ‘ethical funds’ this is usually the top strategy they’ll use, although the criteria can vary significantly between funds. One of the issues with this strategy is that large, multinational companies will often derive profits from multiple industries, particularly when you consider subsidiaries. As a result, funds will often allocate some leeway, for instance, avoiding companies that derive more than 5% of their profits for certain activities.

In terms of your investment and returns, negative screening will potentially mean cutting out entire industries. As always, it’s important to keep in mind how balanced your portfolio is and how it aligns with your financial goals.

2. Positive screening

In contrast to the above, you don’t avoid investing in certain companies when using a positive screening strategy, but actively seek to invest in certain firms. It means investing in businesses that are championing the values you have.

Going back to the climate change example, with a positive screening strategy, it may mean investing in companies that are operating in renewables or researching new technologies that could help. Often, investors will allocate a portion of their investment portfolio to supporting their values.

This has both pros and cons. One advantage is that it means you don’t miss out on potential investment opportunities, as you may with a negative screening process. On the other hand, it may mean investing in companies that don’t align with your values.

3. Engagement

Finally, an engagement strategy is about using shareholder power to encourage change within a company. Due to needing significant shareholder power to influence, this strategy is more commonly used by institutional investors, such as pension funds. However, that doesn’t mean it’s irrelevant to you. It’s still possible to engage with your pension provider, for example, to encourage them to use their influence.

Which strategy is right for you?

It’s important to keep in mind that there’s no right or wrong answer here.

You may have a preference about which strategy you’d prefer, or maybe you want to blend them. However, it’s just as important to look at your wider financial circumstances and how investment decisions will affect your goals. This is an area we can help with. Looking at your existing assets and how these can be adapted to reflect ethical views, can lead to a portfolio that supports both your ethics and aspirations.

Setting out your values

If you’re beginning to consider incorporating ethical investing in some way, the first step is to consider your values. What’s important to you?

One of the challenges with ethical investing is that it’s a highly subjective area. What you may consider unethical, may be acceptable to others. This can make it difficult to find funds that align with your views. Setting out what your priorities are can give you a starting point. According to research from Triodos Bank, the top five industries investors would want to avoid are:

• Manufacturing or selling of arms and weapons (38%)
• Worker/supply chain exploitation (37%)
• Environmental negligence (36%)
• Tobacco (30%)
• Gambling (29%)

Do you agree with these? Before investing your money through an ethical fund, take some time to look at the criteria. There may be instances where you need to compromise, so you should also think about how comfortable you’ll be with this.

If you’d like to discuss your current investment portfolio, please get in touch. We’ll help you understand how it’s currently invested and potential changes that could be made, reflecting your views and financial position.

Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Einstein once reportedly referred to compound interest as the ‘eighth wonder of the world’, stating: “He who understands it, earns it, he who doesn’t, pays it”. So, just what is compound interest and when do you benefit from it?

Whilst financial jargon can often seem complex, compound interest is actually simple and easy to take advantage of. The term refers to the principle that when you save money you can earn interest on not only your initial contributions but on the interest itself. So, if you leave your money in a savings account for an extended period of time, the amount of interest earned can grow significantly. As a result, the rate that your savings grow gets faster.

Let’s say you deposit £1,000 into a savings account that pays 10% interest a year. In that first year, you’d earn £100 in interest. However, if you leave both your initial saving and interest, the following year, you’d receive £110 in interest. The more frequently interest payments are made, the greater the effects of compounding.

The same principle can be beneficial when you’re investing too. Investing returns delivered means they can go on to potentially deliver returns themselves.

Why is compounding so important?

Compounding means that even if you don’t add to savings and investments, they can continue to grow. Over a long period of time, this can lead to a substantial financial boost as interest or returns accumulate. This can be highlighted by looking at how pension contributions accumulate over different time periods.

Past research has demonstrated how saving into a pension for 10 years at the beginning of your working life could result in a bigger pot than saving for four decades. The study assumed annual pension contributions of £2,500 and investment growth of 7% a year:

• Someone that starts saving at the age of 21 and then stops at 30 would have a pension fund worth ��553,000 by the age of 70 if no further contributions were made and gains were reinvested. This is after contributions of £25,000 grow by a factor of 22 over the long term.
• In contrast, someone saving from 30 until retiring at 70 would have a pension of £534,000. By saving later in life, under this scenario, people contribute £100,000 to their pension but it grows by a little more than fivefold.

Another way to visualise the effects of compound interest is to think about how long it would take to double your money if savings were benefitting from 10% interest. If you answer quickly, your response might be ‘ten years’. But with compound interest having an effect, it takes just seven years.

When does compound interest matter to you?

As compound interest has the greatest effect over the long term, the impacts will be most felt on the financial areas where you’re looking to the future. This may include:

• Long-term saving accounts
• Pensions
• Investment portfolios
• Savings for children or grandchildren

It can be difficult to calculate the full impact of compound interest, particularly when investing, but there are calculators available online. Simply knowing that leaving interest and returns untouched can boost your savings can help you take advantage of compounding.

Understanding compound interest can help you get the most out of savings. For a comprehensive financial review, please get in touch with us.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.