Ethical investing: a short guide

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.

Lots of people are attracted to the idea of “ethical investing”. Yet what is it exactly? How do you get started with building an ethical portfolio? The subject can seem more overwhelming to British expats living in Spain, since it may be less clear what your options are regarding investment opportunities and platforms (compared to a UK resident).

In this guide, our Alicante financial advisers here at Scottsdale explain how ethical investing works and the main strategies which investors can follow. We hope these insights are useful to you. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

+34 966 460 407

What is ethical investing?

In simple terms, ethical investing is concerned with generating investment returns (e.g. capital gains and/or income, such as dividends) whilst pursuing ethical objectives. This is also known as “ESG” investing, which is a label often attached to investments which seek to promote environmental protection, social justice or good governance.

For instance, an equity fund might call itself a “green” fund by focusing its investors’ money on renewable energy companies. Another might concentrate more on the “S” or “G” in ESG by prioritising companies which are leading their peers in gender equality (e.g. in the board room) or anti-corruption practices in supply chains.

Different ways to invest ethically

Not all investors have the same ethical priorities and values. We are all different. To cater to different needs, the financial sector has tried to offer various options for building an ethical portfolio. Broadly, these fall into four categories.

The first is often called the “exclusionary approach” and sees the investor filtering out all companies and funds which contradict his/her values. For example, an investor wanting to take a strong stand against the tobacco industry or oil extractors can steer away from these completely. This approach is perhaps the oldest ESG investing approach and is arguably the easiest to understand. It aligns the best with the investor’s values, giving them peace of mind. However, it is also the hardest type of ESG portfolio to construct due to more limited choices.

The second approach is called “positive” or “inclusionary” ESG investing. Here, certain industries are not excluded outright from a portfolio (e.g. mineral ore companies). Instead, investors prioritise companies in these industries which have a strong moral record in comparison with their peers. For instance, a precious gem extractor might be included in a portfolio if it goes beyond its rivals in employee relations or diversity.

This is similar, in some ways, to the third approach – called “divestiture” or ESG “integration”. This more “cautious” strategy involves slowly incorporating ESG investments into an investor’s traditional portfolio. Divestiture is arguably less risky than quickly overhauling the portfolio to completely reflect the investor’s values. However, it is also less radical.

The final option is known as “impact” investing, or “shareholder activism”, and is most relevant to shareholders in smaller private businesses. Here, the investor can push ESG items up the board agenda, prodding management on key issues such as discrimination, low worker pay or environmentally damaging supply practices.

How do I start an ethical portfolio?

In 2024 there are now tens of thousands of funds which call themselves “ethical”, “ESG” or similar. Yet please note that there are no universally accepted criteria stating which funds are allowed to describe themselves in this way.

Indeed, many funds can mislead investors by calling themselves ESG but contain underlying investments which conflict with the former’s ethical values. Therefore, it is important to “look under the hood” of different investment options to check their ESG credentials.

This process can be complex and lengthy. Also, ESG funds can change over time – perhaps later failing to uphold their moral standards. Therefore, consider working with a financial adviser to narrow down your list of potential ESG options for your portfolio.

A professional can also help you explore the four ESG strategies mentioned above in more detail, helping you identify the best one for you considering your unique goals and circumstances. Over time, once your investment plan is implemented, a financial adviser can also keep an eye on your portfolio – checking that it continues to reflect your asset allocation and ESG strategy.

Being an ethical investor does not mean ignoring the time-honoured principles of investing, it is important that your portfolio is properly diversified (spreading risk across lots of investments). It should also be constructed to integrate with your tax plan, avoiding needless erosion of investment returns. Again, a financial adviser can guide you through this ongoing process of portfolio optimisation and management.


If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

+34 966 460 407


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