Ethical Investing: What It Is and How to Do It

It's growing in popularity. So how are investors empowering themselves by putting their ethical values at the forefront?

WORDS BY
Maria Collinge
Published
January 19, 2024
Ethical investing can lead the charge toward addressing global challenges such as climate change and gender inequality (Image: Female Invest)
Tags
Investing
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Ethical investing is the practice of allocating capital in a way that takes into account environmental, social and governance (ESG) criteria. It is growing in popularity as investors aim to achieve financial returns while also creating positive social and environmental impacts.

In fact, women are better investors than men when it comes to ethical investing because they are more likely to prioritize goals such as making a positive impact on the world, greater attention to risk management, and a deeper understanding of non-financial issues like sustainability. With women leading more and more of our private investments, ethical investing can lead the charge toward addressing global challenges such as climate change and gender inequality.

What is ethical investing?

Ethical investing is an empowering investment strategy that puts people and ethical values first, aiming to secure good returns while doing so. Rather than accepting the all-too-common and suspicious illegal deals on the rise, ethical investors are driving real change in the market by demanding that the companies they invest in treat their employees with respect, offer healthy products, and stay away from unethical practices. This ethical way of investing builds stronger communities and ethical business practices that sustain our world for many generations to come.

Women appear to be leading the ethical investing movement among individual investors (Image: Female Invest)

Who are ethical investors?

Ethical investing is gaining traction as a popular and meaningful way for investors to put their money where their values lead. By carefully selecting companies to invest in, ethical investors have the power to impose their values by avoiding companies that produce tobacco or own investments in corporations that do, or those with poor environmental records, promoting human rights and diversity, supporting ethical supply chains etc.

This type of investing sends a strong message to corporations while also aligning investor wealth with their ethical beliefs. The result is an empowering ethical stance that puts the control squarely in the hands of informed decision makers: ethical investors.

Women are ethical investors

Women appear to be leading the ethical investing movement among individual investors. Studies have shown that women are more likely than men to prefer ethical investments, which demonstrate their dedication to values-based practices in the financial world. At a time when ethical finance continues to grow in popularity and importance, women can take pride in being at the forefront of positive change in this sector. These ethical decisions provide a helpful boost to communities and businesses around the world and show that women can drive true social impact through their choices.

Ethical investing is a meaningful way for investors to put their money where their values lead.

Types of ethical investments

1. Socially responsible investing funds (SRI funds)

SRI funds specialize in this kind of investing, where the investor’s moral value is given paramount importance in investment selection, avoiding controversial areas such as gambling, firearms, tobacco, alcohol, and oil. By doing so, SRI funds allow ethical investors to take control of their financial future while simultaneously delivering on their promised ethical commitment. This kind of ethical investing is an empowering tool for those looking to make ethical decisions that have a long-lasting impact.

ESG funds

With ethical investing on the rise, ESG funds are increasingly attractive to many investors. By taking environmental, social and governance risks into consideration during their decision-making process, they cause material impacts on a company's performance while maintaining the same level of returns as one would with traditional practices. 

So not only do ethical investments look good on paper, results often reflect it in reality. It's no longer a compromise between ethical values and profitable investments; there is now an enjoyable relationship between the two. Therefore, if you're ready to take your ethical investing to the next level, then ESG funds could be your start.

Impact funds

Impact funds provide social responsibility investors with an exciting way to see a return on investment. They are all about ethical investing – aggressively looking for responsible companies that provide ethical products and services, whilst still being mindful of creating strong returns for their clients. 

It's a distinguished form of investing that finally gives ethical investors the chance to make both ethical investments and financial gains - no longer do they have to put ethical values at odds with financial success. So, if you want to invest in a way that is in line with your ethical beliefs, jump on the impact fund train and ride it all the way to financial success.

Faith-based funds

Faith-based funds offer investors a unique opportunity to manage their finances in accordance with religious beliefs and values. This approach to investing focuses on aligning money with religious ideals, without sacrificing the overall financial performance of an investment portfolio.

There are a variety of ways people can start ethical investing, but it's important to filter through the options and figure what works for you (Photo: Clem Onojejhuo)

While others are playing a guessing game when it comes to stocks and funds, those who choose faith-based investing can take comfort knowing that their funds are following principles of spiritual integrity – and reaping the rewards of successful investments at the same time! A well-balanced faith-based portfolio could easily be the best way to both honour your religion and make optimal use of your sources for income.

Advantages of ethical investing

It turns out that there are several distinct benefits to ethical investing, from financial gains to ethical satisfaction.

1. Align your investments with your values

One of the primary advantages of ethical investing is that it allows you to align your investments with your values. If you care about issues such as environmental sustainability or social justice, you can invest in companies that are working to make a positive impact in those areas. Conversely, if you want to avoid supporting companies that are engaged in activities that you deem to be unethical, such as animal testing or the production of tobacco products, you can avoid investing in those companies.

2. Potentially higher returns

Despite popular belief, ethical investing does not necessarily mean sacrificing returns in order to do good. In fact, many studies have shown that investments in companies with strong environmental, social, and governance (ESG) practices have outperformed the broader market over the long term. One study found that a portfolio of companies with high ESG scores generated returns of nearly 13% per year between 2010 and 2016, while the S&P 500 index returned less than 9% over the same period.

3. Reduce your investment risk

Investing in companies with strong ESG practices can also help to reduce your investment risk. This is because companies that are focused on sustainability and other social issues tend to be better managed overall, which can lead to improved financial performance and reduced volatility. For example, a study by MSCI found that companies with strong ESG ratings had 30% less volatility than those with weak ratings.

4. Make a positive impact on society

Another advantage of ethical investing is that it allows you to make a positive impact on society. By investing in companies that are working to solve social and environmental problems, you can help to support their efforts and make a difference in the world. Additionally, as more people invest ethically, it will put pressure on all companies to improve their ESG practices, which can lead to positive changes at a societal level.

An advantage of ethical investing is that it allows you to make a positive impact on society (Image: Jon Tyson/Unsplash)

5. Enjoy peace of mind

Finally, ethical investing can provide peace of mind knowing that your money is being used in a way that is consistent with your values. This can be particularly important for those who want to avoid supporting businesses that engage in activities they find morally objectionable

Disadvantages of ethical investing

If ethical investing is a part of your financial portfolio, you may find yourself faced with some potential pitfalls

1. Limited options

One of the primary disadvantages of ethical investing is that there are often limited options available. This is because many companies do not meet the criteria that ethical investors typically look for, such as environmental sustainability or fair labour practices. As a result, ethical investors may have to forego investing in certain companies or sectors in order to maintain their ethical standards.

2. Missed opportunities

Another disadvantage of ethical investing is that investors may miss out on opportunities to make money. This is because companies that are considered unethical may be more likely to engage in activities that generate high returns, such as cutting corners on environmental regulations or paying workers low wages. While ethical investors may avoid these companies, they may also miss out on potential profits.

3. Negative screening

A third disadvantage of ethical investing is that it can lead to negative screening, which is when investors avoid companies that they perceive to be unethical without considering whether or not those companies are actually good investments. This can lead to sub-optimal investment portfolios and missed opportunities for returns.

4. Underperformance

Finally, ethical investing can sometimes lead to underperformance, as the pool of investable companies is often smaller than the overall market. This means that ethical investors may have a harder time finding companies that will generate strong returns, and their portfolios may not perform as well as those of non-ethical investors.

Does ethical investing work?

There is a common fallacy, often held by ethical investors, that boycotting an “evil” company means no money goes to the organization in question. Sadly, this is not the case - ethical investing can certainly be a powerful tool to combat such big businesses, but it is not a silver bullet, and won't necessarily stop money going to such companies as long as other people remain unconcerned. Fortunately, ethical investors provide an ethical alternative and are a sign of people taking matters into their own hands.

In fact, there are many companies who claim to be ethical in the approach, but end up being unethical in their practices. It's important to try and identify who these are. Because, a company that claims to be sustainable, but adopts unethical labour practices, is not a sustainable company. Here's some things to consider:

  • Achieving sustainability has become increasingly difficult and it's where additionality comes in. This clever concept allows a business not only to survive but to thrive while minimizing any potential risks associated with ethical investment. There's no quick fix: succeeding at ethical investing requires dedication, research and smart preparation to ensure long-term success!
  • By shunning companies that engage in unethical, unlawful, or otherwise morally objectionable activities, more and more people are actively demonstrating their ethical values and ethical boundaries. Though investing this way won't make these companies disappear, it will just significantly reduce their profits.
  • Although it sends a powerful message to all businesses that people expect ethical standards and responsible corporate behaviour, there will always be those who are willing to ignore ethical considerations in pursuit of higher returns - so it's up to ethical investors to continue supporting ethical organizations and truly make an impactful change.

Final thoughts

Ethical investing can be expensive, but it pays off in the long run by empowering investors to leverage their power and make a positive difference in society. After all, why settle for returns when you can also meet your ethical, moral, social and religious values? 

Doing your research is key to achieving this, so don’t forget to do your due diligence before taking the plunge. That said, don’t assume ethical investments alone can redraw the ethical landscape – boycotting companies does not always mean they won’t succeed since other investors will still be happy to reap financial returns instead.

Tags
Investing

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