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What is ethical investing?

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Last editedDec 20202 min read

Investors often select investments based on their beliefs about what is good or bad for the larger society. So, when an investor deliberately selects investments which carry little or no negative implications for the society, we call this ethical investing. It generally thrives on an investor’s ethics, but that’s not all. Keep reading to learn more about ethical investing and why it’s desirable.

Introduction to Ethical Investing

Ethical investing is the act of filtering investment securities based on one’s moral or ethical principles. The investor’s principles shape ethical investing. The investor, and nobody else, defines the most ethical companies to invest in.

Ethical investing bears many different names, among which are impact investing, socially responsible investing, green investing as well as environmental, social and governance (ESG) investing. All are focused on aligning investments with certain ethical principles. ESG investing for example avoids investments that pose ESG risks such as climate change, reduced respect for human rights, non-compliance to regulations, bribery and corruption etc. 

Due to differences in moral principles, one investment-management company’s portfolio may contain ethical investment funds that are quite different from another’s. In essence, what one company or portfolio manager considers as ethical stocks to invest in may be different from what another portfolio manager regards as ethical stocks. As such, ethical investing has no certification or recognised standards; it’s more of a personalised investment approach.

Types of Ethical Investment

There are no clearly defined types of ethical investments, and understandably so. In reality, what obtains are different approaches to ethical investing based on religious, environmental, political or social principles.

  • Environmental: With this approach, what investors consider as ethical stocks to invest in are stocks of companies that actively pursue positive environmental impact. These include companies that provide alternative energies, shun fossil fuels and generally seek to protect the environment through their products or policies. Lower carbon footprint and green technology are some of the investors’ priorities here.

  • Religious: From the perspective of a faith-inclined ethical investor, the most ethical companies to invest in are those that support their religious values or, at least, do not contradict them. Faith-inclined ethical investing seeks to avoid sin stocks―companies that enable immoral or unethical activities. These may include investments in firearms, tobacco, gambling, alcohol, etc. 

  • Socio-political: Socially Responsible Investing (SRI) largely makes up this type of ethical investment. Before investing, the investor here engages in an activity called ethical investment screening, which helps to identify stocks that align with their social-political ethics, such as those which improve gender diversity or advance minority groups.

How Ethical Investing Works in Practice 

Ethical investing often aligns with the current prevalent socio-political movement. So, for three decades now, environmental issues have remained at the forefront of ethical investments with ethical investors filtering stocks based on their potential environmental impacts.

Ethical investing could be practised via avoidance, whereby investors avoid unethical stocks. Here, investors evaluate which investments to sidestep. However, determining unethical investing requires research as several cases abound where companies parade themselves as what they’re not, in a bid to attract investors. So, an ideal ethical investment involves a serious scrutiny of the company's adherence to ethical standards. 

Another way to go about ethical investing is to actively find ethical stocks to invest in, and finally invest in those aligning with one’s ethics.

It is worth noting that the outcome of an ethical investment scrutiny does not determine investment performance. So, a stock considered unethical may be top-performing, while this may not be the case for a stock considered ethical. As such, in addition to ethical grounds, it’s important to consider what stocks to invest in light of its current performance, future projection, profitability and sustainability.

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