We, as private investors should, at the very least, try to have some rough idea as to how our money is being put to use.

Some of us, for instance, might focus on specific geographic regions such as India or China, while others could prefer particular industries such as high technology or mining. In recent years, the choices open to us have expanded greatly through the explosion of funds that focus on socially responsible investing. It has caught the imagination of both the fund management industry and investors alike.

30 green years

Ethical investing is not especially new, though. It has been around for over three decades. In the main, investing with an eye on our social responsibility is a good thing. After all, no one would ever want to condone child labour, the wanton destruction of our environment or the promotion of wars and conflicts. Those are pretty clear-cut.

However, where exactly do we draw the line with issues such as equal opportunity, boardroom diversity, animal testing and responsible lending? These issues invariably crop up when we negotiate the road of social responsibility. If we are too strict with our ethical criteria, we could severely confine the number of companies that we could realistically invest in.

You decide

One easy way to gain exposure to ethical investing could be to delegate the responsibility of choosing the right companies to professional money managers. They will either screen out or screen in suitable investments for us. But that inevitably incurs costs, which can eat into our investment returns. There is something else to consider also, namely, whether our own definition of ethical coincides with that of the money manager.

One way to assume greater control of the way that our money is invested could be to build our own portfolio of ethical shares.  A good starting point could be to examine the main holdings of ethical funds that have, presumably, done some careful and judicious selecting already.

What’s ethical?

CIMB, for example, runs the CIMB S&P Ethical Asia Pacific Dividend ETF. Its Singapore-listed holdings include Hutchison Port Holdings, Singapore Technologies Engineering, CapitaMall Trust and Singapore Telecommunications.

Since its inception in 2012, the fund has delivered an annualised total return of 6.7%. Over the same period, a plain vanilla Singapore stock market index tracker has delivered roughly the same. On that score, there appears little to choose between the ethical investment and the wider market.

Interestingly though, some might argue that not all of those companies should qualify as ethical. And there lies the problem with investing with a social conscience.

How ethical are you?

There is, unfortunately, no objective definition of ethical. It can mean different things to different people. In fact, even the fund management industry finds it difficult to arrive at an all-embracing term to describe the investing strategy. Should it be described as being green, socially responsible, sustainable, environmentally responsible or just ethical?

Perhaps the best solution could be to build our own ethical portfolios, if you wish to go down that route. It solves the problem of what should go in and what should stay out. That is the easy bit. The harder part could be to justify the returns when compared to a less ethical portfolio.

Source: Motley Fool