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Investment In Ethical Funds

May 3, 2008
As the popularity of preserving the environment continues to gain momentum, some investors are turning away from traditional managed funds and are instead investing in funds that have higher ethical standards. This means that the funds invest in industries, businesses, and other entities based on their ability to have a positive impact on the environment rather than a negative impact. Companies whose goals are to provide renewable energy, companies who regularly recycle materials used to create their products and industries that do not rely on non-renewable resources may be included in an ethical fund.

For many investors, defining what's ethical and what is not remains the ultimate question. For example, if a logging company, which derives its income by harvesting trees, takes the time to replenish the supply of lumber by planting new trees, is it considered ethical enough to be included in an ethical fund? Some investors would argue yes, while others would say no because the company has still damaged the environment even though it has taken the time to replace the trees with new ones.

Are Ethical Funds Profitable?

As with any managed fund, the amount the fund earns each year will vary depending on how it's managed, market conditions and many other factors. Overall, ethical funds have kept up with traditional managed funds, and in a lot of cases ethical funds have actually outperformed traditional funds.

When choosing an ethical fund, it's important to look at the criteria by which it chooses its investments. Find out the types of companies and industries the fund manager invests in as this will help you determine if it's worth investing your money.

How Ethical Funds are Chosen

Ethical funds are chosen using positive or negative screening or a combination of both. Positive screening involves looking for companies or industries that have upheld the ethical standards necessary to continue producing a product or service without doing significant damage to the environment. Companies that have changed the types of materials they use to become more eco-friendly or companies that have improved working conditions for employees would be considered a wise investment for an ethical fund.

Negative screening involves rejecting companies or industries that do not demonstrate environmental concern or those companies that promote the use of tobacco, alcohol or other substances that do not promote the health of people.

Companies that fit the criteria set up by the fund will be included. Others will be avoided. This screening process is done often because companies that may not have been considered ethical in the past may have made changes that are now considered suitable for investment by the fund.

Researching Funds

When considering investing in managed funds - whether in an ethical fund or a more traditional fund - it is always a good idea to review independent research on the fund for an objective professional opinion. It is also important to consider the fees charged by the fund, as they can differ significantly between funds and will impact on your final return as an investor.
About the Author
Written by Jonathan Hamber for 2020 DirectInvest, an Australian discount broker providing direct access to ethical funds with no entry fees.
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