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What is ethical investing?

Rounding it up

  • Ethical investing has a few different sub-categories, but at its core, this strategy is a way of investing that aligns with personal ethics.

  • There are 5 main types of ethical investing: ESG (environment, social, and governance), socially responsible, sustainable, impact, and moral.

  • At the end of the day, you should always invest in companies whose mission and values you support because your investment increases their impact.

7 min read

Ally Streelman
#investing#investments#ethical investing#ESG investing

We’ve all heard the phrase “vote with your wallet,” and that pretty much sums up ethical investing. There is a bit more to it than that, though. There are many different types of ethical investing, all with different names, which can make things confusing for investors. Here, we’ll dive into what constitutes the different types of ethical investing, reasons to consider this investment approach, and how to do it.

So… What is ethical investing really?

Well, it depends on who you talk to. There are quite a few investment types that fall under the “ethical investing” umbrella. At large, ethical investing is a strategy that focuses on investing in companies that align with personal ethics. Of course, these ethics are different for everyone.

Companies that are considered ethical by professionals usually meet a set of high standards, whether those standards pertain to how they treat their employees, how they confront their environmental impact, and/or what type of products they profit from, to name a few. Of course, just because a company is deemed “ethical” doesn’t make it a wise investment. Applying your ethics to your investments is only part of the strategy; don’t forget the basic principles of investing that will help you determine if putting money into an ethical company or fund is an actual investment — AKA, something that will appreciate in value over time.

5 Types of ethical investing

As we mentioned, there are multiple types of or names for ethical investing. Let’s dive into what each one means so you can decide what and if one is right for you.

1. Environmental, social, and governance (ESG) investing

Traditionally, investment research centres around the financials of a company. ESG investing, however, expands the realm of research to include a company’s environmental, social, and governance practices.

A company is given an ESG rating in each of these three areas. For example, maybe a company gives back to their community or enacts racial and gender equality standards. They’re practicing exceptional social practices and would be given a high rating in the social category. On the other hand, those with net-zero carbon emissions and energy-conscious production processes would be given a high rating in the environmental category. You can discover ESG ratings on many investment platforms such as Bloomberg, which has data on over 11,500 companies.

These scores can be helpful for investors in a few ways. For one, they help signal the companies that have ethical practices, which can be difficult to determine for an individual investor. Second, ESG scores show which companies are meeting or exceeding industry standards for environmental, social, or governance practices (or all of the above!)and therefore are considered to be less risky.

2. Socially responsible investing (SRI)

While ESG investing focuses on what companies are doing, socially responsible investing also focuses on what they aren’t doing. Socially responsible investing avoids investing in companies that profit from or take part in harmful activities. These harmful activities can be anything from tobacco sales to low labor standards. It assumes that companies should have a responsibility to the world and its customers.

Additionally, this type of ethical investing typically takes a more targeted approach to investing in companies that align with personal views or beliefs. Keep in mind, any fund labeled as “socially responsible” or “ethical” will likely have its own set of standards for eliminating or including companies, so it’s your job to discover what those standards are and if they align with your own.

3. Sustainable investing

Sustainable investing could be categorized as a form of socially responsible investing as well. Also called “green investing”, sustainable investing is the practice of investing in companies that aim to protect and preserve the environment through their business practices. A company could be considered “green” for several environmentally conscious activities, like responsible waste management, incorporation of recyclable materials in the production of its products, and production of alternative energy sources. Once again, given the variety of ways companies can “go green,” you’ll need to do your research as to what sustainable means to the company or fund in which you plan to invest.

According to the US SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, US assets managed using sustainable investing strategies increased by 42 percent from the start of 2018 to the start of 2020. According to the foundation, “sustainable” includes ESG factors and socially responsible factors as well.

4. Impact investing

If you haven’t already noticed, there is a lot of overlap among the major types of ethical investing, impact investing included. Impact investing is just what it sounds like: investing in companies that make a positive impact on the world, which can include sustainable companies, socially responsible companies, and companies with high ESG ratings. Common examples of impact investments include non-profits such as education and healthcare companies, and companies making strides in renewable energy and agriculture.

But impact investing is also more than that. It’s investing in companies that have a positive impact on your wallet (earn you great returns) too. Of course, this should be a priority with any investment, impact, sustainable, or otherwise.

"At large, ethical investing is a strategy that focuses on investing in companies that align with personal ethics."

5. Moral investing

While the above are the mainstream types of ethical investing often referred to by brokerage firms, financial advisors, and fund managers, you can be an ethical investor by simply picking and choosing stocks according to your own moral code. In avoiding investing in companies that partake in practices you disagree with and investing in companies that support the causes you support, you are taking an ethical investing approach. For more ways to support causes you care about with your wallet, learn how to budget for a better world.

How to ethically invest

Now that you know what the unique types of ethical investments are, you may be ready to dip your toe into the world of ethical investing. Here’s how to do it:

1. Reflect and research

It’s important to note that the different types of ethical investing are, although different, often used interchangeably. There is no standardized definition for ethical, impact, or moral investing. Some impact investment funds likely have companies that score high on the ESG scale and some investments that qualify as SRI may also be labelled as sustainable. Before investing ethically, you should first decide what that means to you. What policies, practices, and businesses do you want to support, and what do you want to intentionally avoid?

2. Invest on your own

Investing according to personal ethics is, well, personal. So it makes sense if you want to be the one in charge of picking the companies you put your money into. While investing on your own can require quite a bit of time and research, it can be done. Plus, you’re not totally on your own. Many brokerages offer resources and search filters to help you discover companies with practices that align with your ethics. Investing on your own will give you peace of mind knowing exactly what you are investing in and a boost of pride knowing the impact of your chosen companies.

3. Invest in an ethical fund

If picking the right individual companies to invest in sounds intimidating, you’re in luck. Given both the growing popularity of ethical investing and demand for companies that strive to have a positive impact on the world, ethical funds are easy to come by.

An ethical fund is a mutual fund or a basket of stocks such as an ETF that is made up of ethical companies. As we mentioned above, every fund will have a different set of standards as to what it deems ethical or unethical; some will be called ESG funds or sustainable funds, and others will simply be called ethical funds. So, before you go putting $$$ into a fund, do your research and determine if that fund aligns with what you consider to be ethical.

As with any investment, it’s important to thoroughly research any fund you plan to invest in and understand the associated risks — there is never a guaranteed return. However, there is room for positivity, as the funds made up of highly-rated ESG companies outperformed traditional funds in 2020.

The impact

Your investment in a company does make a difference. It encourages the stock price to tick up, which affects the company’s value in the eyes of other investors and thus, how it operates. If your investment can have an impact not only on the company but also on the world, then all the more reason to go for it.

At the end of the day, all investing should be intentional. You should always invest in companies whose mission and values you support. After all, you are hoping they succeed and grow so that you get a good return on your investment. If you don’t support a company’s mission or don’t want to increase its impact, you shouldn’t support it with your personal capital.

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