They always say that you should put your money where your mouth is. If you believe in causes like environmental sustainability, human rights, social justice, and consumer protection, then ethical investing is a great way to kill two birds with one stone (pardon the metaphor).
How to Start Ethical Investing
- Decide Your Ethics
- Figure Out Investment Types
- Research Companies
- Review Fund Rules
Ethical investing is also referred to as socially responsible investing (SRI for short). Other times it might be referred to as sustainable socially conscious investing or green investing, the latter term referring specifically to companies with an environmental focus.
Ethical investing is an investment trend, particularly among retail investors. However, it does have some older roots. Economic historians have suggested that ethical investing began with religious groups like the Quakers, who prohibited members from participating in the slave trade at the 1758 Philadelphia Yearly Meeting. Methodist preacher John Wesley also outlined ethical investing practices in his sermon “The Use of Money,” such as avoiding investments in certain industries that harmed the health of its workers. And of course, even those lightly familiar with history are aware of temperance movements that have encouraged people to eschew alcohol, tobacco, gambling, and other vices.
In the 20th century, the Civil Rights Movement in America and the fight to end apartheid in South Africa provided additional opportunities for consumers to make their voices heard with their money. And as globalization has broadened, deepened, and complicated the scope of supply chains for consumer products, many everyday people have embraced environmental and human rights causes in their quest to purchase goods and services that are ethically sourced.
What is Ethical Investing?
For investors in the stock market, this means buying stock in companies committed to operating ethically. Of course, the word investing does imply that their money should see a return. That said, ethical investors are not only seeking companies that operate in resonance with their own personal set of concerns (human, environmental, social), but that also stand to succeed financially.
Another metric used to determine a company’s ethics is their ESG—environmental, social, and corporate governance. The three ESG factors help an investor determine if a company is a socially responsible investment. Environmental relates to a company’s level of investment in sustainable practices, like renewable energy and divestment from fossil fuel companies. Social responsibility relates to human factors internally and externally, such as operating in countries that respect human rights and investing in communities. Governance relates to how the business is run, including such factors as reasonable executive pay and HR policies that foster a respectful and safe workplace.
An individual stock or investment portfolio dedicated to companies with strong ESG factors is often referred to as an ESG investment or ESG funds. This type of investment strategy may seem counterintuitive because the primary objective of any investment decision is primarily about making money, not necessarily ethical practices. However, research has shown that so-called sustainable investing in an ethical company or mutual fund of ethical companies is financially profitable. Even international banks, like Triodos, are committed to making each and every business loan a responsible investment. This is in part due to increased consumer demand to be supplied by companies that are committed to operating ethically in terms of the environment, human rights, and corporate governance.
How to Start Ethical Investing
Decide Your Ethics
What causes are important to you? Maybe it’s preventing deforestation or saving endangered species from extinction. Or even the humane treatment of workers in terms of pay and working conditions. Do you care about the reduction of the carbon footprint and reduced CO2 emissions? Or investments in infrastructure, education, and healthcare in the emerging markets that provide company labor or customers?
Different causes speak more to some people than others. Chances are, there is already a cause in your orbit that you’ve been informed about through the news, from reading, or by a personal connection. It is advisable, however, to do a little deeper digging and make sure you have all your facts straight, since sometimes information can become distorted as it moves through the grapevine. What matters to you might change over time, but once you’ve pinpointed some causes you care about, you’re ready to look into ethical stocks or ethical investment funds.
Figure Out Investment Types
Remember that part of ethical investing is…well, investing. To that end, you will want to explore what types of investments are best for you. Buying and selling stocks is great for stock investors who know how to read the stock market and interpret metrics like dividend yield, price to earnings ratio, and earnings per share. For retail investors who want to be a little less involved, mutual funds or an exchange traded funds (ETF) with a green focus or socially conscious focus might be a better bet.
Note, however, that such ESG funds do take fees for the fund manager, which is a tradeoff that must be factored in. In any case, your financial situation and money-related needs change over time. When you are younger, stocks are a great financial product with excellent investment returns over the course of several decades. But as you get older, a more stable investment product is of greater importance, since the primary function of your portfolio, even an ethical portfolio, is to provide a fixed income.
Sign up for an Infinity Investing membership to learn more about different types of investments and whether they make sense for your portfolio.
Your next step might be to research individual companies in which you want to buy stock, or the companies that comprise the mutual fund into which you’ll invest. Ethical investing has become a financially profitable trend, as it interests a sizable percentage of consumers. These companies are investing in operating ethically, and may elaborate on these concerns on their website. You can also do a quick Google search of news articles to see how a certain company name might connect to phrases like global warming, green energy, or humanitarian.
There are a wide variety of concerns as to what make a company ethical. For instance, a company could be committed to reducing its carbon footprint, but have a terrible work culture. Another company might invest in underserved communities, but source its raw material from disadvantaged emerging markets. Few companies are perfect, and you may have to settle for what’s most ethically run in terms of what is important to you.
Review Fund Rules
If you’re participating in a mutual fund or your employer offers some sort of environmentally friendly or socially conscious retirement plan, you will want to review the terms of the fund, paying attention to things like fees, minimum and maximum periodic contributions, and any potential penalties for liquidating assets before a certain timeframe. This is also important if you’re managing your own money, for example, by using your IRA to invest in socially conscious companies. Certain penalties apply to individuals liquidating their IRA before full retirement, for example, and you cannot contribute more than $6k to an individual IRA per year ($7k for those 50 and older).
How Can You Ensure You are Investing Ethically?
As mentioned, you can always look at a company website and see what they are doing to operate ethically and in resonance with what you care about. Businesses will also print socially conscious accolades on their packaging, for example, if they avoid things like animal testing. But your best bet to stay up-to-date on companies is to follow the news. You can set a Google alert to become informed of certain topics, or you can read periodicals with an environmental or humanitarian bend, such as National Geographic. These publications will alert you to ethical concerns on a global level, which you can then use to conduct more pinpointed research on individual companies. Note, however, that you should check to see that these companies do not make financial contributions to these publications, since that can result in biased coverage.
Again, remember that investing means you have a goal to make money. It would be helpful to build a supportive network of like-minded individuals, guided by experienced investors who understand your personal and financial goals. There are plenty of online forums to address this, along with investment groups like Infinity Investing. An experienced financial advisor can bring together your diverse interests and needs—making money, on the one hand, and doing so in a sustainable and ethical way, on the other.
How Much Does Ethical Investing Affect the Economy?
There have been certain points in history when ethical investing or ethically motivated financial behaviors have toppled geopolitical entities or shut down entire industries. Key examples of this include the Prohibition Era, when alcohol was banned in the United States, and the numerous political boycotts that human rights or environmentally conscious watchdog groups promote against countries or businesses that violate an ethical code.
However, pivotal historical moments and eras aside, it can be difficult to understand if environmental factors really do change consumer behaviors. It would certainly seem, for instance, that the publication Fast Food Nation (which highlighted the negative aspects of the meatpacking industry in America) did not put McDonald’s out of business, and despite the fact that Bayer tested drugs on unwilling human subjects during the Holocaust, most consumers will not think twice about buying Aspirin when they need pain relief.
But as they say, numbers never lie. According to Morningstar, ethical funds outperformed the market, with 66 percent in 2019 landing in the top half of Morningstar’s categories. Some evidence has also suggested that ethically sustainable companies may be less risky, with 24 out of 26 ESG funds outperforming comparably conventional funds, even through the COVID-19 pandemic. And as green energy and humanitarian concerns become more popularly known, even established Fortune500 companies are doing their part to operate ethically. Consumers are increasingly aware about how materials are sourced and how businesses are run, and part of this influx of knowledge is assisted by social media. Whatever the case may be, they have responded by demanding greater accountability from the companies they buy from, making their voices heard through their wallets.
Ethical Investing Can Create Socially Responsible Profits
Ethical investing is all about investing your money in companies that resonate with your sense of what is right and wrong—namely by operating in a way that is right. Whether your primary concern is addressing social inequality, global warming, or violations of consumer rights, there are companies out there that are doing business in accordance with your ethical code.
If you join Infinity Investing, you can learn more about these companies and the other topics that will help you make money in a way that feels morally right. Another name for ethical investing, incidentally, is impact investing. With every dollar you invest, you are strengthening companies that operate ethically, and delivering the impact of making the world a better place. It just so happens that financial decision making as an ethical investor can also be profitable—a win-win for both the investor and the planet, and everyone in it.