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Dec 14, 2020
Jessica McGuigan, a financial planner at Critchleys, answers the top questions on green and alternative investing Investment management companies offering ethical funds should be regulated by the FCA (Photo: northlightimages/Getty/E+) Each week we ask an investment expert questions focused on a particular theme. This week Jessica McGuigan, a qualified financial planner at Critchleys in Oxford, answers questions on green and alternative investing. How can I get started with green investments? Firstly, you want to work out what your priorities are, in relation to your ethical views. Your views could make you an “avoider” and this means you want to choose investments that avoid investing in certain sectors such as tobacco, pornography and alcohol. This is done by picking ethical funds that simply blacklist any companies associated with these areas (this is called negative screening). i's money newsletter: savings and investment advice Email address is invalidEmail address is invalid Thank you for subscribing! Sorry, there was a problem with your subscription. Or, you may want to consider a more positive approach where you invest in sustainable companies that invest into areas that have a positive impact on our futures, such as environmental science, recycling, waste or renewable energy. This is more commonly known as socially responsible investing (SRI), or green investments. Another similar term used nowadays is ESG investing, which stands for environmental, social, governance. This is an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business. For those wanting to do their own fund research, a popular choice for investors wanting to add ethical funds to their portfolios is to invest into one of many funds that are rated by Morningstar. The Government’s money advice service is also a great source of useful general information too, as is the “your ethical money” website . Once you have sourced a fund or funds that are suitable, you can add them to your portfolio perhaps via an investment platform. These allow scope to hold funds in a suitable tax wrapper like a tax-free Isa for example. If you don’t want to do the research yourself and perhaps feel there are too many funds to choose from, then some investment platforms offer ready-made “socially responsible portfolios” which are set up and screened for you. Otherwise, you can of course seek professional advice from a suitably qualified financial planner / adviser. Are green investments always regulated and covered by the FCA and FSCS? No, not always. You do need to be aware that there are some “green” investments out there that are unregulated and not approved by the FCA. You should always read the small print before investing. Investment management companies offering ethical funds should be regulated by the FCA. So by investing into these, you are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per firm if the investment company goes bust. It doesn’t, however, cover you if you make a loss on your investment or if one of the underlying companies you are invested in goes bust – this is a risk you take with investing. Jessica McGuigan is a qualified financial planner What are alternative investments? When investing, you can put your money into different asset classes in order to potentially produce a return (profit). The four main types of asset class that you may have already come across are shares, fixed interest, property and cash. Each of these asset classes produce a different return either via income or capital growth or both. Each asset class also has a different level of risk to your capital and usually the more risk you are willing to take, the greater potential return you could achieve when investing over the longer term (say 5-10 years plus). Today there are many more investment opportunities beyond the traditional offerings. Known as the fifth asset class, alternative investments can be a physical asset – collectibles like art work, cars or whisky . Or financial assets, like commodities, cryptocurrency, hedge funds, private equity and venture capital (to name a few). Read More Why do investors choose alternative investments? In periods where interest rates on cash are low, or shares have been performing badly, this can encourage investors to look at alternative investments to achieve a higher return. For experienced investors, the main appeal of alternative investments is that they typically have a low level of correlation with traditional investments. This means their performance is not generally linked to typical market conditions and can therefore make an investors’ portfolio more diversified. A well-diversified portfolio has exposure to various asset classes and helps spread risk. That way if one asset class is doing badly, the others may still be doing well. Another reason why investors look at alternatives is that they may have an emotional interest to an asset class. For example, there are successful investors who are deeply drawn to venture capital because they enjoy the process of identifying, funding, and taking ownership in startups and relatively new enterprises. Or perhaps the investor considers themselves to be a wine connoisseur. What are the risks? Alternative investments can be illiquid. This means it can be difficult to sell the asset quickly, if you needed to get hold of some cash. Performance can be very unpredictable and volatile. So you could make a lot of money – or lose a lot of money! Many alternative investments are not backed by the Financial Services Compensation Scheme (FSCS). So if the company offering the scheme went bust, you’d be highly likely to lose your money. Many of these alternative investments are subject to much less regulation in comparison to traditional asset based investments – meaning that there is a lot less verified performance data to see how well they have done in the past (regardless of this, like any investment, past performance is not indication of future performance). Alternative investments are often unregulated, meaning that you are more likely to fall victim to an investment scam. They also often have large minimum amounts for investment and higher ongoing fees, meaning they are not typically suitable for many investors. Read More Research and due diligence is key – you should always seek professional advice. For any investors out there thinking about diving into the world of alternative investments, the first step is doing your homework. There are many options and sub sectors of the alternative market, each carrying their own risk and rewards. Understand the different types, how you can invest in them and what specific risks are involved. In any case, investing in alternatives can be risky and you should seek advice from a qualified financial professional who has experience with alternative investments, especially for private equity, hedge funds and venture capital. Jessica McGuigan is a qualified financial planner at Critchleys in Oxford, specialising in investment, retirement and estate planning advice.