By its very nature, ethical investing limits the number of companies you can invest in. By setting such restrictions on your portfolio, you typically limit access to certain verticals or asset types.
A portfolio that’s focused on improving the environment won’t have exposure to oil and gas shares, and rightly so. However, it will most likely focus your portfolio on tech stocks. Of course, tech stocks have performed great over the last ten years, but so did dot com stocks before that bubble burst.
To protect themselves against risk, most prudent investors ensure their funds are widely distributed across sectors to ensure a failure or hiccup in one industry doesn’t impact their whole portfolio. And to do that, you want access to a wide range of asset classes and stocks, which ethical investing doesn’t necessarily provide.
As more and more money is pushed into ethical funds, more money is also pushed into the stocks those funds hold. Consequently, this could in fact be helping to drive up the valuations of those companies deemed to be green, responsible or ethical.
The cynic might think that this actually drives corporate strategies. If you knew your share price would grow if you could show the market how ethical you were, would you do it?
That said, does it really matter? If companies are being forced to consider their environmental impact, look after employees and avoid controversial business practice, surely that’s a good thing? Such is the power of more people demanding ethical investments. It’s simply market forces at work.