Ethical or socially responsible investment are terms to describe any area of the financial sector where the principles of the investor influence which organisation or venture they choose to place their money with. Ethical investment portfolios use three main strategies to implement their investment strategies:
Engagement: No companies are excluded but areas are identified in which companies can improve their environmental, social and ethical performance. The fund managers then "engage" with the companies to encourage them to make such improvements.
Preference: The funds adopt social, environmental or other ethical criteria which they prefer companies to meet. These criteria are applied where all other things are equal (e.g. financial performance).
Screening: An “acceptable list” of companies is created based on chosen positive and/or negative criteria (e.g. avoid companies involved in the arms trade, include companies with good environmental performance and so on). Funds are invested only in those companies on the list.
The Dow Jones Sustainability Index (DJSI) and the FTSE4Good are two investment indexes that track the financial performance of the leading sustainability-driven companies worldwide. To be included in the FTSE4Good, companies must be:
Working towards environmental sustainability
Developing positive relationships with stakeholders
Upholding and supporting universal human rights.