Are Ethical Investment Funds Higher Risk Than Other Similar Funds?

The nature of investing with your morals has obvious side effects. One of these is that the risks associated with ethical investment funds are higher. There are several reasons for this which shall be explained below.

Firstly, it may seem obvious to comment on, but is often overlooked that fund managers might have a very small number of potential investments to choose from. If the criteria of the fund is applied rigidly, the fund manager may only have a very small number of approved potential companies. This is known as a small universe of potential shares.

The companies available to a fund manager may be from only very selected industries. This lack of potential companies and sectors can make the returns of a fund more volatile than might otherwise be the case. These funds can become less and less diversified. Though this is a still a potential problem, the increasing numbers of ethical investment funds offer an investor many different choices. It is now possible to select from ethical funds aimed towards income or growth and have a range of risk profiles and asset mixes.

These funds are often now termed in relation to 'shades of green'. Those funds using a positive selection criteria and hoping to encourage better corporate behaviour are often referred to as lighter green. Ethical investment funds which exclude companies whose corporate behaviour is not approved of are usually termed as darker green.