A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as where you want to see your money invested. From there you can come up with an asset allocation plan and begin researching individual securities and funds.
There are three main approaches to ethical investment, which can be used in combination or on their own:
- Screening. There is currently no one universally agreed definition of what constitutes unethical investment, but a common way that fund managers decide on an ethical strategy is using a process called screening;
- Preference or best-of-sector. A preference or best-of-sector approach applies social, environmental and ethical guidelines to give a preferred selection when all other factors are equal. For example, an ethical fund might have criteria that enable it to invest in the oil and gas sector, but will only invest in those oil companies that are ‘best in their sector’, meaning these preferred companies have better records on the environment and human rights than other companies in their sector;
- Shareholder activism. The third approach is activism, in which investors attempt to positively influence corporate behaviour. This approach doesn’t have to exclude, include or prefer companies. Instead, the active investor or fund manager encourages companies to adopt social and environmental best practices, often through meetings with senior management or through voting at annual general meetings.