Ethical Investments: Guide To Making Smart, Moral Money Moves

Ethical investing is a strategy that allows you to put your money where your morals are. It involves selecting investments that align with your personal ethical principles, such as environmental, social, and governance (ESG) factors. This approach goes beyond financial analysis and considers the broader impact of your investments on society and the environment.

When making ethical investments, it's important to reflect on your values and priorities. Different types of ethical investing include ESG, socially responsible investing, sustainable investing, impact investing, and moral investing. You can choose to invest in companies that meet high standards in areas such as employee treatment, environmental impact, and product type.

However, ethical investing is complex, and what is considered ethical can vary from person to person. It's crucial to research and understand a company's practices and values before investing. Building an ethical portfolio may involve setting clear financial and ethical goals, choosing suitable investments that meet your criteria, and staying informed about the companies you invest in.

While ethical investing allows you to support companies that align with your values, it's important to remember that it does not guarantee superior financial performance. Ethical funds may perform similarly to traditional funds, and the decision to invest ethically should be driven by your desire to create positive change.

Environmental, social, and governance (ESG) investing

The three main components of ESG factors are:

• Environmental – This includes a company's conservation of the natural world, such as its energy use, waste management, treatment of animals, and carbon emissions.
• Social – This covers a company's consideration of people and relationships, including gender and diversity, charitable donations, contributions to the local community, and worker conditions.
• Governance – This relates to the standards for running a company, including leadership, executive pay, audits, internal controls, shareholder rights, and transparent accounting methods.

ESG ratings are assigned to companies in each of these three areas, helping investors identify those with ethical practices and meeting or exceeding industry standards. While ESG investing grew out of Socially Responsible Investing (SRI), it differs in that it seeks to find value in companies rather than just supporting a set of values.

Socially responsible investing (SRI)

SRI typically involves a targeted approach to investing in companies that align with personal values or beliefs. For example, investors might seek out companies that engage in social justice, environmental sustainability, and alternative energy efforts. On the other hand, SRI also involves avoiding companies that profit from or engage in harmful activities, such as tobacco sales or low labour standards.

Community investing is one form of SRI, where investments are made directly into organisations with a strong track record of social responsibility and community impact. These organisations often work to provide affordable housing, loans, and other services that improve the quality of life in their communities.

SRI has been growing in popularity, with investors increasingly interested in aligning their investments with their values. However, it is important to remember that socially responsible investments are still investments, and there is no guarantee that a socially responsible company will provide good returns. Therefore, investors should conduct thorough research and carefully assess the financial outlook of any potential investment.

Sustainable investing

Some examples of environmentally conscious activities that companies may engage in include responsible waste management, the incorporation of recyclable materials in the production of products, and the production of alternative energy sources.

According to the US SIF Foundation's 2020 Report, US assets managed using sustainable investing strategies increased by 42% from the start of 2018 to the start of 2020.

When considering sustainable investing, it is important to research the specific activities that a company engages in to determine if they align with your values. Additionally, it is important to remember that just because a company is deemed ethical does not make it a wise investment. Basic investment principles should also be considered to determine if an investment is likely to appreciate in value over time.

Impact investing

Examples of impact investment themes include affordable housing, healthcare, access to education, financial services, sanitation, sustainable agriculture, and environmental conservation. Impact investments can span various asset classes, geographies, and instruments.

When considering impact investing, it is important to reflect and research the different types of ethical investing, as there is no standardised definition for impact investing. It often overlaps with other forms of ethical investing, such as ESG (environmental, social, and governance), socially responsible investing, and sustainable investing.

Moral investing

The core principle of moral investing is to put your money where your morals are. This means investing in companies whose mission and values you support, and avoiding companies that partake in practices you disagree with. Moral investing is highly personalised, and there is no standardised definition. It is up to each individual investor to decide what policies, practices, and businesses they want to support and avoid.

When deciding how to invest morally, it is important to reflect and research to determine which companies align with your values. This can include evaluating a company's environmental practices, social impact, and governance structures. It is also crucial to remember that just because a company is deemed ethical does not make it a wise investment. Basic investment principles should also be considered to determine if an investment is likely to appreciate in value over time.

Once you have identified your moral investing criteria, you can choose to invest on your own by picking specific companies that meet your standards. Many brokerages offer resources and search filters to help with this process. Alternatively, you can invest in an ethical fund, such as a mutual fund or an ETF, which is made up of ethical companies. It is important to thoroughly research any fund you plan to invest in and understand the associated risks, as there is never a guaranteed return.

Frequently asked questions