Finding ways of making sure that you invest your money ethically is becoming increasingly important to many people. Most ordinary savers today are keen to know exactly where and how their money is being used – and so the financial services industry is having to respond to this with increasingly innovative and ethically sound products. But, as with most things in the world of finance, the choice of options available to investors can sometimes be intimidatingly complex. So, you want to do the right thing and invest your money ethically – but where do you start? Here is our quick guide to investing your money for good.

Just how ethical do you really want to be?

It is worth looking first of all at what exactly is meant by ‘ethical investing’, because it is a term that can actually cover a wide range of investment types. This is an important starting point because it will help you to begin to identify just how far you want to go down the ethical investment path, and will give you an idea of any balance you are prepared to strike between the ethical aspects of your investment and the opportunities there are to get a good return.

A great way of looking at and understanding exactly what kinds of ethical investments are out there is to use the ‘Sustainability Smile’ model, which was first developed by portfolio manager Patrick Drum. It’s a useful way to understand the different kinds of socially responsible that are available.

A broad spectrum of options

So, here’s how Dunn breaks it down. At one end of the spectrum you have traditional finance, which focuses purely on getting good investment returns for investors. This is investment that, while it is not necessarily unethical, has no overtly ethical angle. Investors who put their money into financial products of this kind are generally looking simply to make as much money as possible. At the other end of the spectrum is philanthropy. This is the kind of investment where the investor is not expecting to see any real financial return, but instead the benefit they get is the knowledge that they are supporting a cause that is beneficial to society.

Those are the two extremes – but it is in the middle of this spectrum of ethical investment types that most of us will be considering putting our money. And there are number of different investment types here too.

The middle ground

The first of these is known as integrated investing. The idea here is that the fund still puts profit first but takes environmental, social and governance impact into account.

Next along the scale, as we travel towards the philanthropic end of the spectrum, is ethical investing. Here, the fund or financial product you are investing in explicitly avoids putting money into industries or sectors that people consider to be harmful. This could be anything from alcohol and tobacco companies through to arms suppliers or pornography. It’s worth pointing out here that this kind of investing is ethical only in the sense that it doesn’t support ‘unethical’ causes. That doesn’t necessarily mean that the money you are investing will be used to support any kind of positive social action.

Finally, just before we get into Bill Gates-style philanthropy, is an area that is known as ‘impact investing’. As the name suggests, this is all about putting your money into a particular company or organisation that you believe in, in order to help them to fulfil their goals. In this kind of investing, you’re still looking to make some money on your investment, but it is very much as secondary consideration.

Is expecting good performance realistic?

That model will hopefully help you to think more about just how important the ethical element in any investment you’re considering is. But is it really possible to actually get good financial performance and have an ethical element to your financial portfolio? Research suggests it is.

When a number of different ethical and ‘non-ethical’ or traditional funds were compared, on average the ethical funds outperformed the more ‘traditional’ investments quite significantly – showing average growth of 16.8% for the ethical option against 15.2% for the average non-ethical funds. This was sustained over three and five year periods, although the traditional funds regained the advantage over a decade.

So, if you’re considering having an ethical element within your investment portfolio, it is good to know that not compromising on your beliefs doesn’t necessarily mean you need to compromise on any potential returns.