Busting the myths around ethical investing

Ethical investing is getting more and more popular. But there are still some common misconceptions that need clearing out of the way…

You can’t beat the market with ethical investing

The tobacco and oil sectors are usually excluded on ethical grounds.

Both have well-established reputations as profitable places for your money. And with good reason – they have hugely impressive long-term track records.

That might make you wonder how it’s possible to beat the market if you don’t invest in these sectors, especially when they make up around 22% of the FTSE 100 benchmark.

But history tells us goliaths like British American Tobacco, Imperial Brands, BP and Royal Dutch Shell shouldn’t be thought of as one way bets.

The Gulf of Mexico spill sent BP shares into a spin in 2010 and a few years later plummeting prices meant oil & gas was one of the worst performing sectors of 2014 and 2015. Investors up to their knees in oil would’ve been wishing they’d stayed clear.

Even tobacco, traditionally a more stable industry, has been volatile lately. The upheaval of new types of smoking devices threatens the industry, while tougher regulations and dwindling sales remain concerns.

The average investor has been better off without any exposure to the sector in these last couple of years.

All the while, other consumer goods groups have seen their shares rise. Unilever, which features on the FTSE4Good index (an index of ethical companies, chosen by the FTSE group), is a prime example.

Of course, the past performance of a company shouldn’t be used as a guide to what might happen in the future. But if you think ethical investing can never beat the market, you should think again.

Remember all investments can fall as well as rise so you could get back less than you invest.

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Sustainability comes at the expense of profits

Sustainability is important. And not just for the planet.

It’s easy to see how it might cost more to be responsible in business - paying workers a fair salary drains the coffers.

But it’s worth remembering what happened when Henry Ford increased pay for those on the car maker’s production line to $5 a day. That was more than double what workers could expect elsewhere, so despite the extra cost, the move boosted staff retention and efficiency.

Fast forward to the present day and some of the most successful companies in the world are following Ford’s lead by investing in their staff. Amazon’s working practices aren’t to everyone’s taste, but it will pay up to 95% of the costs of studying for a degree. Fellow US-listed giant Google has gyms and free food on hand for its staff.

On the contrary, cutting corners or focusing on short-term profits can cost companies dear. A few of the UK’s biggest companies are finding that out the hard way.

Mining giant BHP Billiton has paid out billions in the years since the Samarco dam disaster in Brazil, while regulatory fines on the back of PPI and US mortgage mis-selling have been gargantuan for banks like RBS and Lloyds.

You can find out more about a company’s ethical criteria, and what it does to tackle issues like its environmental impact and employee wellbeing in its annual report. These are available through our website. Just navigate to the factsheet of the shares you are interested in, and click the financials tab.

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Ethical investors only have too shallow a pool to choose from

The limits are only as severe as you want them to be. That’s because with ethical investing, you’re in control.

It’s up to you what you invest in, and what you choose to avoid. You don’t need to automatically discount any particular sector.

For instance if you only invest in what you consider the best of the available options, rather than ruling out entire sectors. This might mean picking the oil company with the best safety record, or the miner with the best environmental record.

The ability to set your own rules makes ethical investing more flexible than you might think.

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This article and our research are provided to help you make your own decisions. They aren’t personal advice. If you’re not sure on the suitability of an investment for your circumstances, please seek advice.