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Show notes

Recorded remotely in summer 2020 while we were all in quarantine, this episode was requested by a listener who started thinking about where her money was invested in light of the Black Lives Matter protests and the conversations about corporate behaviour that these provoked.

Our listener, Lucy, wanted to know how to perform “an ethical spring clean of her finances”.

We brought in two guests to help.

Georgia Stewart is the Chief Executive of Tumelo, a financial technology company that empowers investors to use their shareholder votes for good.

Tom Morris is a Chartered Financial Planner at Ovation Finance and a director of the Initiative for Financial Wellbeing. He’s also one of the hosts of the Financial Wellbeing Podcast.

In this episode we discussed how putting money into a pension or ISA probably means you own shares, whether you realise it or not and that this means you are a part-owner of a company. So what do you do if the companies whose shares your hold aren’t operating in the way you want and you’d like them to change? Or what if you don’t want to put any money at all into a particular sector, for example tobacco, coal, or weapons manufacture? This is where ethical investing comes into play.

There are lots of different names for ethical investing. It can also be called socially responsible investing (SRI), environmental social and governance (ESG) investing or impact investing. These terms all have slightly different meanings which Tom explains in the episode. Or you can check out Investopedia here.

There are several ways to invest ethically:

• You can focus on avoiding investing in companies whose activities you don’t like;

• you can actively choose to invest in companies you think are doing good;

• or you can invest in companies whose activities you want to influence and then use your rights as a shareholder to change how they operate. This is known as stewardship.

The last type of investing is where Tumelo aim to help. Companies ask shareholders to vote on specific issues, for example, whether they should expand their business in a certain country or whether they should adopt a new policy about how staff are treated. The right to vote on these issues may be directly with you, the investor, if you directly own the shares. If your money is pooled into a fund with lots of other investors’ money (common in ISAs and pension schemes) then the fund manager has the right to vote on your behalf. Most people don’t know about these rights and even if they do, they rarely know when a vote is due soon, unless they’re paying a lot of attention to their investments. Tumelo informs investors when a vote is coming up and gives them a way to either vote quickly and easily, or communicate their preferences to their fund manager, so the manager can consider this when voting on their behalf.

We also discussed the importance of understanding that a fund’s ethical criteria might not align with your values because what one person considers ethical may differ from another.

We talked about the need to consider fees and charges, financial returns and how well a fund is being managed as well as the ethical side of things.

We also discussed the importance of diversification, that is to say, spreading investments out across different companies, sectors, and even countries, so that even if one is doing badly, another is likely to be doing well and balance things out for you. Ethical investing that screens out companies can reduce diversification, but increasingly companies are working to meet the criteria necessary to be included in ethical funds.

Tom said that ethical funds usually require active management, which means that a human fund manager picks the stocks that go into them. This can lead to slightly higher charges than index tracking, or passive, funds, where investments are chosen by a computer programme to try to match an index, like the FTSE 100.

If you want to understand more about this topic and your own finances, here is the advice our guests gave:

• Look for the following words on you fund information: responsible; sustainable; ethical; ESG

• Look for the extent of information about the ethical criteria of the fund you are thinking about buying into. Try to see whether these are clear and transparent or whether the managers are being vague and trying to seem ethical without really demonstrating what change they are seeking to make.

• Take a look at or Good with Money, Ethical Screening, or Fund Eco Market.

• Don’t be perfectionist, there probably isn’t the perfect ethical fund for you, but instead seek a good enough fund.

• Speak to an adviser, some even specialise in ethical funds.

You can find our guests on Twitter @tumeloHQ , @IAmGeorgiaS and @OvationTommo

If you have company pension that could work with Tumelo to give your employees more awareness of how their money is being invested and create more engagement with your scheme, you can learn more here.

The Financial Wellbeing Podcast is on all major podcast apps and you can find out more about the Initiative for Financial Wellbeing here.