The first investment funds to take into account investors’ principles were based on traditional or religious values. These are generally labelled Ethical funds.

At a minimum they usually avoid investing in companies that go against traditional values, including gambling, adult entertainment, weapons, tobacco, and alcohol. Some ethical funds are specifically designed to meet the needs of those with strict religious principles. They will often screen out other companies but the criteria can vary considerably between funds. Adhering to principles is generally considered more important than performance.

Investment fund managers primarily take into account the financial data of a company when deciding to invest in them. But they can also look at that company’s policies and practices.

In particular, they focus on practices regarding preservation of the environment, their social policies regarding the fair treatment of people and communities, and their responsible governance. These are called ESG criteria.

Scoring how well they perform in these areas using consistent methods can help identify those companies that are actively doing well in all those areas, and those that are not. Scores are available from different agencies, such as MSCI - click here to look up the ESG scores of companies that you know. That does not mean to say you would like the activities of a company with a high ESG score or that they would align with your personal values. The performance of an ESG fund is as important as the criteria being applied.

Socially responsible investment or Stewardship funds apply their own criteria to determine which companies to exclude from their funds. They often exclude the ‘sin stocks’ as a starting point, the same as an ethical fund, but then apply extra criteria on top, often using ESG scoring.

That’s because a company with a high ESG score could still be profiting from selling services or products that are harmful and not socially responsible.

Consider supermarkets, which generally have high ESG scores but yet sell tobacco, alcohol, fossil fuels, single use plastics, and fast fashion, all of which could be considered to be harmful. Socially responsible, or stewardship, funds actively screen out companies with poor policies and aim to actively invest in companies with good policies. The performance of a socially responsible or stewardship fund is as important as the criteria being applied.

Sustainable or Green investing

A sustainable investment fund is much like a socially responsible or ethical fund, but manged with environmental principles at the forefront.

They actively invest in companies with business practices that protect the environment, and exclude those where business practices are harming the environment. They are sometimes described as Dark Green or Light Green funds. The criteria being applied to each investment fund can vary significantly and they can have different themes, such as climate change, or pollution prevention, often aligned with one or more of the UN Sustainable Development Goals. The principles of these types of fund are as important as the performance.

An Impact investment fund intentionally invests in companies that are expected to make a positive impact on the world and aims not to invest in those that will not.

For example, impact investment funds commonly invest in healthcare companies, education, or those in the renewable energy sector. Many impact funds will measure the social and environmental performance of the underlying companies they invest in, as well as reporting the financial returns. The criteria applied by the managers of impact funds can vary significantly. They may take into account a company’s ESG scores to indicate whether they have good practices, but the emphasis is also on the goods and services the company sell. The principles of an Impact fund are considered as important as achieving good returns.