Ethical investing is a scam: Here's why

Introduction

Consumers nowadays are becoming smarter and increasingly more aware of what buying one avocado fruit implies. If the price of the product is too good to be true, that is most likely the case. From where and how the avocado plant was cultivated, to the people who picked it, to the carbon footprint of shipping it, consumers demand ethically produced goods. This ethical trend has spilled over in many sectors, including investing which has gained considerable traction in recent years. But before we tell you why ethical investing is a scam, let’s start at the beginning.

What is Ethical Investing?

Fun fact: Did you know that ethical investing started off due to religious and cooperative movements in the early 19th century?

Ethical investment is a strategy which allows the investor to select investments based on a set of ethical values, which can stem from religious values and social values, and financial returns. If you want to learn more about ethical investment and how it works, you can read our blog titled "‘Ethical Investing: Aligning Investments with Values’."

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So why are ethical investments a scam?

Financial Underperformance

Ethical funds are underperforming compared to traditional funds because investors exclude certain industries and companies from their portfolio, thus limiting their opportunities… is what you have probably been told.  

It is true that if we are looking at the year 2022 in isolation, the performance of ethical investments did falter compared to their non-ethical counterparts, especially in the energy sector. However, the hype for non-ethical investments quickly subsided in the first half of 2023, when sustainable funds outperformed. Sustainable investments have also performed well during the pandemic.

Overall, ethical investments are not necessarily limiting or underperforming. These investments are also influenced by socio-political and environmental factors. Generally speaking, ethical investments do just as well and sometimes even better than traditional investments.

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Subjectivity & Lack of Standardisation

What does ‘ethical’mean? Well, it depends. ‘Ethical’ investing, since it is based on a personal perception of ethics, can vary greatly from person to person. Try asking your friends and relatives what ethical investing would mean to each and every one of them and you will probably get similar yet different answers.

And that can be a problem. Because there isn’t really a proper definition of what ethical investing actually constitutes, screening criteria and reporting practices wildly differ. Therefore, comparing ethical investment options can be tricky business.

Is subjectivity really a bad thing?

Not quite. Creating universal standards would create gaps in the market, reduce competition and would be less inclusive. While the International Financial Reporting Standards (IFRS) do not directly relate to ethical investing, they can still help you decide which investment opportunities are better-suited. The IFRS provide financial reporting standards to ensure that financial reports are fair, consistent, and transparent. 

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Greenwashing

We have all come across greenwashing in our day-to-day life. Companies claiming that their products are more environmentally or socially friendly than they actually are. Unfortunately, greenwashing occurs in the investment world as well, as companies and businesses try to attract more investors. While greenwashing can require more effort on the part of the investor, it is easy to spot and combat once you know what to look out for. Our blog on ‘Greenwashing - a good reason for the transparency of sustainable funds’ offers a basic understanding on how greenwashing works and how to figure out if you are being deceived.

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Limited Impact

There is an increased concern that simply moving investing capital around, from one industry to another, will not fix the underlying issue, it just inflates another company’s pockets. However, by supporting companies who conduct their business in a non-harmful way, investors can influence the behaviour of the market and create positive change.

People are known to doubt what the power of one act or decision can change. One sit-up will not give you a six pack, one piece of recycled paper will not stop deforestation, and using a paper straw for your cold brew will not save the turtles, right? Even so, growing interest in ethical investing shows that you are not alone and doing something is better than doing nothing. 

That’s why we created our Moniflo app, where you can invest in mutual funds that fit your values. Moniflo alone cannot change the world, but with your help, we can move towards achieving the United Nations Sustainable Development Goals together!

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Trade-offs and Compromises

Many critics consider ethical investing to be a form of ‘have your cake and eat it too’. Why? Mostly because choosing ethical investment opportunities can be quite restrictive, so you cannot expect to have high returns and also create positive change. This is because you are narrowing down your options by excluding opportunities which do not align with your ethics. Additionally, you will naturally gravitate towards companies and businesses who are open and transparent about their practices, thus making it more difficult for you to diversify your portfolio.

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How to combat this:

• Know what you want - decide what your objectives and values are before creating your portfolio. What issues you want to focus on will provide a clear picture of what options you have.
• Asset classes - choose different types of classes, e.g. bonds, equities, real estate etc. You can also opt for an ‘easier’ route and choose funds which already contain different assets.
• Research, research, research - thoroughly evaluate the companies and businesses you want to invest in to make sure that they align with your goals.
• Monitor and balance - keep an eye on how your portfolio is doing (whether it’s financially or ethically, or both) and re-adjust it to best suit your ethical code.
• Financial professionals - if you need additional help to navigate ethical investments, consider hiring a financial advisor specialised in ethical investment (but be mindful of additional costs).
• Stay informed and stay active - having the right information to make the right decision is very important, but you can also use it to exchange ideas and strategies with others.

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Complexity & Accessibility

From learning the difference between types of investment, to diversification strategies, to ensuring companies are transparent about their claims, ethical investing can be intimidating. So, is ethical investing reserved only for people who have specialised knowledge?  

While being proficient in ethical investing is a great plus, you don’t need to be an expert to invest according to your values. Having the resources to hire a financial professional to advise you can be greatly beneficial, but it is also not the only way. You can opt to invest in mutual funds, actively managed funds or even passive exchange-traded funds.

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Conclusion

Ethical investing is a scam…when not done properly. Like any other type of investment, it has its own risks and concerns. However, dismissing it entirely overlooks the potential for positive change and impact that ethical investing can bring to both investors and society as a whole. Ethical investing is a powerful tool for aligning investments with values and promoting positive change in the world.

At Moniflo, we believe in the power of ethical investing to drive meaningful change. Our platform empowers investors to align their investments with their values, whether it's supporting sustainable practices, promoting social justice, or addressing environmental challenges. Together, we can harness the potential of ethical investing to create a better world for future generations.

Make your money matter by investing according to your values today!

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