Ethical Investing: Aligning Investments with Values

Jordan Abrahams
Table of contents
Jordan Abrahams

Ethical Investing: Aligning Investments with Values

In recent years, there has been a growing interest in ethical investing, also known as sustainable or socially responsible investing (SRI). This approach is about generating financial returns while taking environmental, social and governance (ESG) factors into account. Ethical investing allows individuals to align their investment portfolios with their values and make a positive impact on the world. In this blog post, we will take a closer look at the concept of ethical investing, its benefits, strategies, and the growing importance of investing with purpose.

What is ethical investing and how does it work?

Ethical investing doesn't have to be intimidating, especially with the rise of robo-advisors and socially responsible mutual funds.Ethical investing is an investment strategy in which an investor selects investments based on an ethical code, such as religious or social values, as well as financial returns. Ethical investing seeks to build wealth to support industries that have a positive impact, such as sustainable energy, and is often associated with ESG investing.Of course, the definition of "ethical" depends on the person. What is ethical for you may not be for someone else. That's why it's important to look behind the scenes of ethical investments and make sure they align with your desired impact.

Understanding Ethical Investing:

Ethical investing involves selecting investments based on ESG factors. Environmental factors focus on issues such as climate change, resource scarcity, and pollution. Social factors include human rights, labor standards, community impact, and diversity and inclusion. Governance factors assess the quality and effectiveness of corporate governance, accountability, and transparency. By integrating these aspects into the investment decision-making process, ethical investors aim to support companies and projects that have a positive impact on society and the environment.

The importance of ethical investing

Ethical investing goes beyond purely financial considerations. It enables individuals to support companies and brands that promote sustainable practices, advance social justice, and contribute to positive change. By investing in companies that align with your values, you can influence corporate behavior and drive the transition to a more sustainable and equitable future.

Benefits of ethical investing:

Aligning values and investment choises:

Ethical investing allows individuals to invest according to their personal values and beliefs. It offers the opportunity to support causes and issues that are important to them, such as clean energy, sustainable agriculture, gender equity, or human rights. By investing in companies and funds that prioritize ESG factors, investors can have a meaningful impact and contribute to positive change.

Long-term sustainability and risk mitigation:

Ethical investing recognizes the long-term sustainability of companies and projects. By considering ESG factors, investors can identify risks and opportunities that may be overlooked in traditional investment approaches. Companies with strong ESG practices are often better equipped to address challenges such as regulatory changes or reputational risks. Ethical investing promotes a more comprehensive understanding of the potential risks and opportunities associated with an investment.

Financial Returns:

Contrary to popular belief, ethical investing can offer competitive financial returns. Studies have shown that investors who invest in companies committed to ESG principles often outperform their peers over the long term. By focusing on sustainable practices, these companies are better positioned to adapt to changing market trends, mitigate risk, and attract environmentally conscious consumers.

Access to growth sectors:

Ethical investing provides access to industries and sectors that are engaged in the transition to a more sustainable and inclusive economy. These sectors, such as renewable energy, clean technology, and impact-focused companies, have high growth potential as societies and markets evolve. Investing in these sectors not only supports positive change, but also offers potential financial returns as they evolve.

Strategies for ethical investing:

Negative selection:

Negative selection involves the exclusion of certain companies or industries involved in activities considered unethical or harmful. Common exclusions may include tobacco, weapons manufacturing, fossil fuels, or companies with poor human rights records. Through adverse selection, investors can avoid supporting practices or industries that conflict with their values.

Positive Screening:

Positive Selection focuses on actively selecting companies and projects that exhibit positive ESG characteristics. Investors look for companies that prioritize sustainability, renewable energy, social impact, or other desired characteristics. Positive Selection aims to support companies that are leaders in their respective fields and are making a positive difference.

Impact Investing:

Impact investing involves directing capital into projects or businesses with the explicit intent of achieving measurable social and environmental impacts alongside financial returns. This strategy actively seeks investments that deliver positive outcomes such as affordable housing, clean water initiatives, or sustainable agriculture. Impact investing allows investors to actively contribute to positive change while earning financial returns.

Engagement and Proxy Voting:

Engaging with companies and exercising voting rights are effective tools for ethical investors. By actively participating in shareholder meetings and exercising voting rights, investors can influence corporate policies and practices and encourage companies to adopt more sustainable and responsible approaches. Engagement fosters dialogue between investors and companies and drives positive change from within.

How to build an ethical portfolio:

An ethical portfolio, also known as a socially responsible portfolio or sustainable portfolio, refers to an investment portfolio constructed with the goal of aligning investment dollars with a person's ethical or moral values. The basic idea behind an ethical portfolio is to invest in companies or assets that promote sustainability, social justice, environmental responsibility, and good governance practices.

Building an ethical portfolio doesn't have to become a second job. Here's how to invest ethically:

1. Decide how involved you want to be

When it comes to building an ethical portfolio, you can choose to put it together yourself by selecting specific investments and monitoring them over time, or you can get help.

I want to build my own portfolio.

If you want to make sure that the investments in your portfolio are in line with your ethical beliefs, it may be a good idea to build your own portfolio. Some brokerages are better designed to help you find ethical investments than others. For example, some offer on-screen tools to help you find the right funds for your portfolio. If you don't have a brokerage account yet, here's how to open one.

This is a lot of work.

Most people probably prefer to make socially responsible investments when possible, but "when possible" means different things to different people. It takes a lot of time and effort to find out how committed a company really is or what ethical practices it prioritizes - time you may not want to spend researching stocks. This is where robo-advisors can be helpful: robo-advisors use algorithms to build and manage investment portfolios based on your risk tolerance and goals - and in some cases, your ethical preferences.

2. Know what's ethical to you

Take some time to explain what ethical investing looks like to you. Does an oil company still count as "ethical" to you if it has robust environmental initiatives, or would you completely exclude investments in the oil industry? When you know which industries you want to support and which you want to avoid, it becomes easier to include or exclude certain investments.

3. Find ethical investments

Once you have some money invested in a brokerage account and know your priorities, you can start building a portfolio that aligns with your moral compass. Reading ratings from independent research firms like Morningstar can give you an idea of how well a company is doing on ESG investment factors and whether you want to invest in it.

Two types of investments you can consider for a sustainable portfolio are stocks and funds. Here's what you need to know about them:

Individual stocks: It is generally a good idea to limit the percentage of individual stocks in your portfolio. However, if there is a company that you expect to do well over time, you may want to include it. Some companies offer a sustainability report that tells you about environmentally friendly or cultural initiatives and the company's environmental impact. It's also a good idea to check a company's employee ratings on workplace culture through an independent website like Glassdoor.

Mutual funds: are a quick and easy way to diversify your portfolio, and there is a growing selection of ethical funds. Mutual funds invest according to criteria set by the investor or fund manager, which can include ESG factors. If your broker offers a screening tool, you can explore different funds and stocks to find those that best fit your ethical portfolio.

To find out details about a particular fund, you should review the prospectus, which should be linked on your online broker's website. You should pay particular attention to two things: a fund's holdings (a list of all the companies in which a fund invests) and its expense ratio. The expense ratio is an annual fee charged as a percentage of the investment. For example, if you invest $5,000 in a mutual fund with an annual expense ratio of 1%, you will pay $50 per year. While some funds with "ESG" or "sustainable" in their name have higher expense ratios than traditional funds, there are also ethical sustainable funds that are less expensive than their traditional counterparts.

Do ethical funds underperform?

There is a widespread misconception that ethical funds must sacrifice returns. There is no evidence that ethical funds underperform. In fact, some of them regularly outperform many non-ethically screened competing products.

However, this is not true for all. There are a number of factors that affect the overall performance of all funds. For actively managed ethical funds, consider the following:

  • Does the fund have a clear investment strategy?
  • The length of time the main fund manager has been in the role
  • How is this type of investing evaluated by the parent company?

How big is the ethical investing sector?

In the grand scheme of things, ethical investing is still relatively small, but it is growing fast. Between April and June 2020, funds that invest specifically according to ESG principles saw net inflows of $71.1 billion globally, according to research firm Morningstar.

What is Sustainable Investing?

Sustainable investing, also known as ethical investing, socially responsible investing (SRI), or responsible investing, refers to the practice of selecting investments that align with your personal values and beliefs. It involves considering not only the potential financial outcome, but also the environmental, social and governance (ESG) factors associated with the companies or projects in which you invest.

What are socially responsible investments?

Socially responsible investing, also known as impact investing, ethical investing, or sustainable investing, refers to the practice of selecting investments that align with your personal values and beliefs. This involves considering not only the potential financial outcome, but also the social, environmental and governance (ESG) factors associated with the companies or projects in which you invest.

Ethical investing vs. SRI vs. ESG: What's the difference?

Not much. Ethical investing has many variations, including sustainable investing, socially responsible investing or SRI, green investing, impact investing and ESG investing. Most of them are in the same direction: creating positive change through conscious and intentional investing of your money.

But how this goal is achieved varies. Some include only positive impact investments, while others simply exclude negative impact investments. Still others use both inclusive and exclusive methods. The above terms for ethical investment strategies are often used interchangeably, with no consensus on which are exclusive, which are inclusive, and which are both.

Therefore, it is important to understand a fund's or advisor's methodology when selecting specific investments: Some may simply exclude investments in tobacco and weapons companies and label that portfolio "sustainable" or "socially responsible" without actually including "sustainable" assets.

One important thing to note is that many types of ethical investments, regardless of their name, use ESG investment factors-environmental, social, and governance-to score specific investments along an ethical curve. For example, if you are creating an impact portfolio with a focus on social justice, you may look for investments that score high in the social category of ESG.

Simply invest sustainably

Open an investment account that allows you to invest in funds that match your values.

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