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Today, expats not only want to build a strong portfolio, many also want their investments to make a positive difference to the world. Ethical investing is an investment style that tries to capture this dynamic by aligning an investor’s values (religious, moral or social) with the desire to generate strong returns.
In this guide, we explain how British expats in Spain and other locations can begin exploring an ethical portfolio. Four broad strategies will be described for building an ethical portfolio, together with their respective pros and cons.
What is ethical investing?
Ethical investing can be difficult to define, partly because everyone has different criteria.
One website defines it mainly in negative terms: “Investing in companies whose business is not considered harmful to society or the environment.” In other words, ethical investing is mainly about avoiding certain investments.
Other definitions are more positive: “[Striving] to support industries making a positive impact.” This variation highlights the importance of personal values when an expat considers how to invest ethically.
For instance, are you mostly looking to limit your exposure to certain corporate practices and business models? Or, do you want to try and change how business is “done” – e.g. by investing in innovation (e.g. “green tech”)?
Focusing on your values
Ethical investing can encompass a wide range of areas. Broadly, this is divided into three main categories called ESG, which stands for:
- Environment (e.g. limiting the carbon footprint of a supply chain).
- Society (e.g. promoting fair labour practices in a workforce located in a poor country).
- Governance (e.g. boosting gender equality in corporate boardrooms).
It is certainly possible to build an ethical portfolio which encompasses all three of these areas. However, many investors often find that specific areas resonate with them more deeply.
Consider your values when thinking about ethical investing. Where does your heart truly lie, and where could you make the most difference with how you invest your money?
Types of ethical investing
Expat investors have at least four broad options when it comes to building an ethical portfolio:
- Integration. Here, the investor seeks to bring “ESG criteria” more into decision-making about investment choices. For instance, a fund which is handed a poor ESG score may be removed from the portfolio. This approach is a bit of a sliding scale; it could have a high impact on asset allocation and performance or insubstantial, depending on how the investor applies the ESG integration.
- Exclusion. Sometimes called “negative screening,” this involves removing certain sectors and companies from your portfolio based on your values (e.g. tobacco, oil and gas and gambling companies).
- Positive impact investing. Also known just as “impact investing,” this investment style looks for firms that are actively trying to solve ESG problems (e.g. carbon emissions).
- Positive screening. Sometimes known as “best in class,” this approach involves taking the companies that lead their sector with their ESG practices (e.g. an oil company which has created a 50:50 split on their board of men to women) and investing in them.
Which style is right for me?
There are pros and cons to each ethical investment style. It is important to discuss these with your financial adviser when considering your goals, values and circumstances.
For instance, the Exclusion approach often results in a portfolio which most comfortably aligns with an investor’s values. However, it can lead to diversification problems if certain sectors are automatically excluded.
Positive screening arguably overcomes this issue. For instance, if an investor wants an ethical portfolio but recognises that oil companies are crucial to the global energy transition, this style offers a way forward. However, this can blur the lines between “ethical” and “non-ethical” firms, creating issues such as the greenwashing of “ESG funds” and other investments.
For British expats, these questions are often complicated by more first-order ones. In particular, what is the best way to even open an investment account when I live overseas? Which platform will offer a wide range of ethical funds? What fees and taxes will I need to pay, and how might currency exchange affect my returns?
These questions are all interlinked and require careful consideration with a financial adviser who understands your unique challenges and circumstances as a British expat. Here at Scottsdale, we specialise in helping British nationals navigate these issues with confidence during their time overseas.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.