There’s an old adage about voting with your dollars that references the impact people can make based on how they decide to spend their money. How you decide to invest can be an excellent example of this. Ethical investing could potentially not only benefit your bottom line, but the rest of the world as well.
In this article, you’ll learn what ethical investing is, explore its growth in popularity, and discover some of the most popular green investment strategies and opportunities.
What is ethical investing?
Ethical investing is the act of making investment decisions based, at least in part, on moral factors. Whereas much of traditional investing is solely concerned with which assets will rise in value to generate the most positive economic outcomes, ethical investors put a higher premium on what is morally and ethically correct, sometimes at the expense of the bottom line.
Ethical investing can go by many names, including “socially conscious investing,” “green investing,” and “moral investing.” It can then be specified even further into “renewable energy investing,” “pollution control investing,” and more.
The history of ethical investing dates back hundreds of years. Religious beliefs as far back as the 1800s prohibited investment in anything that supported activities such as gambling, slavery, and prostitution. In the mid-20th century, ethical investing grew even more as people questioned the necessity of war and the companies that helped facilitate it. Now, ethical investing is on the rise again, as a new generation of investors and their growing consciousness around health and sustainability enter the market.
There are three main types of socially responsible investing: ESG, SRI, and Impact. These investments place varying degrees of focus on ethical activity.
Environmental, social and governance (ESG) investing
ESG investing takes environmental, social, and governance factors into account (more on those below) when making investment decisions. While there is consideration for ethical aspects when making ESG investments, these are more to determine a company or fund’s profitability, and less so their ability to positively impact the planet.
Socially responsible investing (SRI)
The next step on the ethical investing scale is SRI. Those who practice SRI look at moral and ethical issues to approve or eliminate potential investment opportunities they do or do not want to support. These can be based on a variety of political and religious beliefs or life experiences. Again, more on this later.
Impact investing
Impact investing is theoretically the most altruistic form of ethical investing. With impact investing, investors put an emphasis on investing in organizations and projects they believe will make a positive impact in the world, even at the expense of profit.
What are the 3 pillars of corporate sustainability?
There are three major factors that influence ESG investing, known as the three pillars of corporate sustainability: environmental, social, and governance.
Environmental: These factors include everything from animal testing and reliability on single-use plastics to poor pollution control, commitment to sustainable energy, and combatting climate change overall. For example, an ethical investor might not invest in a company or fund that backs the use of coal or petroleum.
Social: These factors are becoming more prevalent today due to social media and other digital technology shining light on global issues. Social considerations can be anything from human rights issues, exploitation of the workforce, and businesses associated with tobacco and gambling entities.
Governance: These factors relate to the leadership of an organization or entity. This could include everything from how diverse a company’s leadership team is to how much C-suite executives are paid and how transparent they are. Ethical investors will often avoid funds that invest in companies with poor governance.
The growing popularity of the SRI ETF sector
There are a few reasons why SRI exchange-traded funds (ETFs) have become a more popular investment option in recent years.
One reason is that a younger generation of investors is more conscious of issues that affect the world around them. A 2019 white paper from Morgan Stanley entitled Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction, and Choice revealed that 85% of US investors showed an interest in sustainable investing. And in Australia, almost $1 trillion of the $2.24 trillion managed by professional investors in 2019 was classed as responsible.
Another reason that socially responsible investing is on the rise is that more SRI ETF funds have been created to accommodate the increasing interest in ESG investing. These funds are built via a strict screening process that digs into areas of interest for ethical investors. For example, an SRI ETF might consist of organizations and sectors committed to the use and production of renewable energy. Or perhaps there will be a fund full of organizations with diverse leadership boards or that use other hiring practices that promote diversity and inclusion.
So, does ethical investing work? While much of responsible investing is first and foremost based on adhering to moral standards, there is still plenty of opportunity for profit, too. A 2019 report by the Responsible Investment Association of Australasia (RIAA) showed responsible investment funds actually outperformed their mainstream Australian fund counterparts over multiple time frames. Ethical funds also stood up to Morningstar International share funds and mainstream multi-sector growth funds.
Ethical investment opportunities
Whether you want to do your part ethically, want to invest based on your religious or political beliefs, or are just looking to add exciting new assets to your portfolio, there are several key ethical investing sectors that you can dive into today. Go with a cause that is close to your heart or target a green investment opportunity you think has the chance to succeed as the global discussion about sustainability and the future continue to heat up.
Ethical investment strategies
Once you determine your ethical parameters, it’s time to decide on an underlying investment strategy. While there are plenty of different investment strategies to suit different personalities, goals, and lifestyles, here are a few of the most popular when it comes to ethical investing.
- ESG screening is when a portfolio manager or investor examines an asset or company based on the environmental, social, and governing factors discussed above. Its performance in these areas is used as a determining factor in how profitable it can be, not necessarily whether or not it should be excluded from any investment. This is similar to ESG investing as a whole, in that it is more about determining bottom line success than making a moral or ethical choice.
- Negative screening takes ESG screening to the next level. If a fund invests in companies with a poor performance in environmental, social, or governing areas that are important to you, you can decide not to invest in that fund. You screen or remove these funds as options for your portfolio.
- Positive screening, on the other hand, is when you put more emphasis on investing in funds with companies committed to making a positive difference in ESG areas. You add more weight to them as possibilities or go out of your way to include them in your portfolio.
- Engagement investing is when an investor tries to make a meaningful change to a company or fund he or she is already invested in. This can be quite difficult for most investors or fund managers, as many will not have enough ownership in a company or ETF to have a loud enough voice to make change.
- Impact investing is when investors get on the front foot and invest in companies or funds they think can make a difference, while also producing strong dividends.
Ethical investing could be a fantastic option for many reasons. You can feel good about your investments without compromising your morals or ethics, while also helping improve the world around you. And on top of all that, you can end up with some fantastic dividends, especially as the world’s trajectory trends toward more sustainable efforts.
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