What is an Ethical Fund?

Mary McMahon
Mary McMahon

An ethical fund is a mutual fund with strict investment guidelines that limit investment activity to companies known for operating ethically. Such funds can focus on issues like environmental ethics, animal welfare, treatment of workers, and political issues like manufacturing weapons or trading with nations believed to be harboring terrorists. The fund's guidelines can be positive, directing fund managers to specific kinds of investments, or negative, providing information about what kinds of investments to avoid. Numerous companies offer ethical funds for investors who want to behave in a socially responsible way.

Working closely with a fund manager, you can gain insight into which mutual funds invest in socially responsible companies.
Working closely with a fund manager, you can gain insight into which mutual funds invest in socially responsible companies.

Fund managers and other executives develop the guidelines for an ethical fund at the start. They provide clear direction for the kinds of investments the fund can engage in, and these can be periodically adjusted to address changing developments in the business and investment community. Investments made by an ethical fund may be tracked by people who want to generate lists of ethical companies, for the purpose of helping individual investors select ethically sound investments.

Fund managers develop the guidelines for an ethical fund at the fund's inception.
Fund managers develop the guidelines for an ethical fund at the fund's inception.

Ethical funds with a focus on the environment will avoid companies known for polluting, production of environmentally harmful substances, and similar issues. The ethical fund may also try to promote investment in environmentally friendly companies, such as companies working on alternative energy. Animal welfare may be a concern for other funds. The managers of such funds will avoid companies with a history of animal abuse and violations of animal welfare laws, and may seek out companies using alternatives to animal testing and taking other steps to promote animal welfare.

For funds with a focus on worker safety, happiness, and health, the ethical fund will seek out companies with good performance ratings from workers, including companies with good benefits programs for employees, low health and safety violations, and a demonstrated interest in the welfare of employees. Political ethical funds may avoid investments in countries considered enemies, or can choose to avoid investments in weapons systems and related technology. Some funds include a mixture of these traits, while others may focus on only one.

People concerned about ethical investment can purchase shares in a mixture of ethical funds to balance their portfolios, and they can also seek out independent investments. Trade publications tend to list the biggest investments made by ethical funds, along with the ratings used by some funds to rank investments. This information can allow investors to decide which funds they want to invest in, along with identifying securities they might want to acquire independently.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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