What is an ethical company?

Broadly speaking, a truly ethical company will be one that is not causing damage to the environment, exploiting its workforce by paying low wages, using child labour, or producing products which are harmful or dangerous.

Two sets of criteria – one positive, one negative – have been developed to identify ethical investments.

Positive criteria

On the positive front there are two types of approach. The first is known as best of class.

Take pollution, for example. Very few companies could be included in an ethical fund if they were required to have a 100% clean sheet in this regard. However, the best of class method would choose a company that had an excellent and improving pollution record.

The second positive method is thematic investment. This focuses on companies that are believed to be improving the world. They will be industries of the future with growth potential and may be involved in activities such as reusable energy, education, health care, telecommunications, or public transport.

Negative criteria

The Ethical Investment Research Service (EIRS) has produced a set of negative criteria.

The EIRS is a charity that screens companies on behalf of other charities and fund managers. Ethical fund managers will select from the various positive and negative criteria in deciding what to include and exclude from their portfolio. Some funds are more ethical than others.

Negative criteria might cover arms and armaments, companies which produce tobacco or alcohol and companies which have a poor record on pollution control. Different fund management use this information to draw up their own portfolios.