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Sustainable investing, Impact investing, & ESG - labels explained. - YouTube
Channel: Conscious Money
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if you want to invest in line with your
values and make good returns
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focused on long-term sustainable
earnings not just short-term profit
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maximization;
it sounds like you want to invest
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sustainably, ethically.
at the end of this video i will explain
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a little bit more about how
you can demystify the process of
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selecting some funds yourself,
if you do not have access to a financial
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adviser.
as professor Meir Statman argues in
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his book "Finance for normal people", the assumption
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that investing
is a purely rational pursuit
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for a utilitarian benefit just it's just
about making more money
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is simply not true. investing is done by
normal people who want
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utilitarian, expressive and
emotional benefits... from all the products
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and services they purchase and consume
including their investments. in other
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words,
it's perfectly normal for investors to
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apply
"non-economic" filters. ethics can be a
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grey area.
plastic is a very useful substance and
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we can't stop consuming all goods.
the question is how do we use resources
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sustainably
and what does that even mean? at times
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all these decisions can just feel
overwhelming
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including how to invest. "sustainable"
means maintaining a certain levell.
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a path to meet the needs of the present
without compromising future generations
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ability to meet their own.
i actually found this definition and
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really liked it and it's from a book
called
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"the do-gooders guide to investing " by
Adrian Reef. it's quite US
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centric though. Data also shows
that sustainable funds have the
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potential to perform better.
also ,sustainable funds have shown higher
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survivorship rates than traditional
funds over the past 10 years meaning
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fewer sustainable funds have closed down.
asset inflows and sustainable funds are
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growing fast.
there are two factors :the real risk of
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global warming both for
society and for investments and a shift
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from looking at profits for just
shareholders and just short-term profits
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to true value to all stakeholders - which
ultimately
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does benefit the corporation,
stakeholders as well as society.
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ethical investing has many names.. some
include green investing,
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socially responsible investing, esg
focused
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impact investing, thematic investing,
purpose-driven investing ...i wouldn't
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worry too much about these labels.
All it is ..is filtering what to invest in
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based on what is important to you. The
evolution of
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SRI or socially responsible investing
really started with a focus on what
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investors didn't want.
this is called negative screening. for
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example:controversial weapons, tobacco or
thermal coal.
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we also have positive screening like
support for health and
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education in the local community. impact
investing started with philanthropists
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and investors
wanting to invest money and do social
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good
while also holding on to their capital
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and receiving financial returns.
impact investing funds focus on the 17
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United Nations (UN) sustainable development goals such
as no hunger
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and responsible consumption. these funds
support positive initiatives like
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renewable energy or affordable housing
and focus on benefiting stakeholders and
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the community.
a good example for business that focuses
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on corporate social responsibility
(CSR) in local communities is Danone
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which helps to distribute nutritional
yogurt to fight against
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malnutrition in Bangladesh while also
helping farmers
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and local women earn a living. there's a
really great book
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called 'building social business' by Dr. Muhammad Yunus
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which talks a lot about Danone and some
other social businesses
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CSR is about how a company relates to
its stakeholders
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and the world around them- over and above
just profits.
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ESG refers to an investment process used
more and more even by conventional firms
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used more and more even by conventional
funds and investment firms
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to filter out criteria for issues with
financial
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and material risk.ESG stands for
environmental ,social and governance
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which you probably already know
the E criteria for environment could
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include how the company's operations
look at waste
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or energy or carbon emissions. the S
is for social and therefore it looks at
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the human aspects,
the people aspects... which are quite
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important in the whole of the ESG
and you would look at things like supply
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chain, how employees are treated,
employee well-being and so on. there's
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also
significant reputational damage when an
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employer gets this wrong.
we've seen during this time this time of
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Covid 19,
some employees have been paid quite
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fairly by companies like Patagonia
and other companies have responded in
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not so kind a way,
receiving a backlash. recently boohoo, a
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uk apparel company,
was in the headlines for allegations of
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sweatshop factories,
modern slavery and poor working
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conditions.
and the G refers to corporate governance
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so things like
board pay, gender diversity and so forth
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Companies that score high on ESG tend to be
well-run businesses that treat their
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stakeholders well,
address their environmental challenges,
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enjoy
more conservative balance sheets and
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have
lower levels of controversies. they tend
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to be
more resilient during market downturns
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another way that you can engage is as a
shareholder or
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as an annual general meeting (AGM)
activist. you can find out more about
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this in the uk
at shareaction.org. if you have a pension
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in the uk and it's not ethically
invested-
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more than likely, you have about five to
ten percent invested in fossil fuel
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companies;
which may or may not align with your
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values. so do log into your work pensions
and have a look at the top ten holdings
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of the funds you are invested in.
it's quite easy to spot. you have power
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to influence your organization at work
and you can use that to ask to invest in
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companies that you want to.
you might believe that payday loan
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sharks... these are lenders that charge an
exorbitant rate of interest
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often to vulnerable groups of people... are
morally wrong
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and you might discover that you have an
accidental investment exposure to them.
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for example, the Church of England who
have a moral stand against loan sharks
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discovered they had a small stake in
Wonga a few years ago.
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Wonga, a payday lender, charged an APR,
annual percentage rate of 1509%
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and had questionable debt collection
practices
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Wonga is no more. So ,ethical investing
is a way to walk your talk... to have
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financial integrity,
to vote with your wallet and to exercise
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some of your own personal power
in asking for a world that you want.
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negative screenings now include
a high number of criteria and this is
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rapidly evolving.
environmental damage, human rights
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violations,
animal testing medical and non-medical
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manipulative advertising and so on and
so forth
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so as you've probably gathered the focus
on negative screening is on avoiding
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creating harm. positive screening
criteria is more towards...
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looking at what the business is doing
operationally
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to help the local community: education,
health care and things like that
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So, what are the differences between
ethical
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versus not . with ethical,you have a
smaller investment universe to choose
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from
although a rapidly expanding one with
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even some
conventional funds repurposing to SRI
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not all companies report equally
smaller companies, for example, may not
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keep up with larger ones
so that may introduce a bias
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and the other big one is fees. however
active sustainable funds charge about
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the same as conventional,
active funds so not a big deal
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you do need good old-fashioned HI like
AI.. artificial intelligence... human
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intelligence
and a research team to sift through
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companies.
the research team would look to avoid
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green washing,
which is the process of conveying a
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false impression
or providing misleading information
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about how a company's products are more
environmentally sound.
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overall OCF or ongoing charges figure
for my ethical client portfolios in the
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UK
are around 0.7 to 0.8%
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percent per annum.
if a client tells me, she's fee sensitive
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then Iensure we have a thorough
conversation
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and accommodate criteria for lower fund
fees too. for some reason,
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fund charges seem a lot higher in the US
however sustainable
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and active funds even in the US seem to
be about the same.
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you have a great choice of passive
investing too
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with lower fees with big players in
global asset management
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like Vanguard, Blackrock and State Street
getting involved in the ESG world.
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however,
if you want higher quality filtering,
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based on your criteria, the devil is in
the detail.
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ESG passive funds cost a bit more than conventional passive funds
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but the differential seems minor. i'm
speaking anecdotally from client
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reactions. passive funds can hold from a
100 to a thousand companies... so effective
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engagement
is difficult. smaller companies find it
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harder to keep
up with the level of information
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required by research houses.
this means that large companies like
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British American Tobacco, for example,
can score higher than companies whose
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operations are focused on
finding a solution to cancer caused by
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cigarette smoke.
so, if you are an investor and you want
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to start investing ethically without an
adviser, where do you start?
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by the way, if you need an advisor
because you have decided you
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do not have the willingness or the
capacity or the interest
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to do this research yourself, my top tip
is go to a specialist. i will list
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resources for a directory in the UK,
so you can find one more easily. you want
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to find an adviser who is independent,
has an active understanding of
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sustainable investing,
is well read on the latest research and
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is open to create a solution based on
what is important to you.
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if they say that sustainable investing
is not profitable
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or have negative views on it , find a
different adviser.
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actually, we could do a lot more in the
industry to have standardized processes
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and practices
for retail investors to do their own
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research. there is no easy
rule book or process to follow... however,
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i'll give you a few tips. remember,
this is not financial advice in any way
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my content
is for educational purposes only.
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therefore, i don't have any fund names in
my video today
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as i am a regulated financial adviser, i
have to be careful
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you can use fundecomarket to filter
through
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based on the criteria you want. it is
free to use
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and there's also an app that you can
download. after you filter through on
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fundecomarket, the best website to go
through is a website called trustnet
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which is also free to use. you will have
to read through the details of the fund
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factsheet ,look at the investment
objectives
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and ethical criteria, past performance,
performance in relation to benchmark, UK
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regulation
and any other information important to
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you to satisfy yourself that it
meets the criteria that you have in mind.
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also,
you can read through the fund prospectus
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(KIID) key investors information documents
for more information. don't rely on just
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the fund name.
the fund name may contain words like
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ethical, responsible,
clean, green, sustainable
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but the lines are getting blurred
between traditional funds looking to
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incorporate some ESG
and sustainable investments. you can also
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look at your cash savings and look at
banks and building societies
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in which you believe in. i have no
specific recommendation but there's a
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lot of information if you
look for it online. remember ,we also have
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to demand
policy action and systemic change.
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individuals can't provide subsidies for
clean energy
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or put a price on carbon or deter people
from using plastic unnecessarily,
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but governments can. we need politicians
who will support
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climate friendly policies. meanwhile go
easy on yourselves
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if at times, like me ,you feel like a
hypocrite...
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remember, we simply aren't in control of
everything that happens in the universe
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in order to make perfectly ethical
decisions at all times.
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at times, inadvertently or otherwise,
our actions and buying decisions cause
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harm
and we have to invest how the world is
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not how
we would like it to be while also
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working towards the world that we want.
ESG investing has had massive, massive
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interest with greater choice being added
at rapid speed.
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my hope is that companies will adapt to
thrive in a world that values
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a safer, happier, healthier quality of
life.
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a world that works for everyone
including beautiful creatures like birds
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bees and fish in the ocean .that's it
from me
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on ethical investing. Happy Investing! if
you are on facebook, there are also some
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really good facebook groups
where you can go and ask questions about
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SRI
there is a facebook group for women in
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personal finance and there is one called
socially
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conscious mustachians. i will link it in
the description below.
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