More investors nowadays are conscious of what their money does once they invest in different companies. They do not want their money supporting companies, businesses and industries they disagree with at a moral level. For these investors, ethical investing is the best option.
What is ethical investing?
Ethical investing is a strategy where investors use their religious, social or moral principles to filter the companies, businesses and industries they invest in. Their ethical values become the primary driver for investment decisions, rather than good returns.
What are the potential financial returns compared to traditional investing?
Recent studies suggest that ethical investing can be just as profitable as traditional investing, if not more. Companies with strong ethical values may have lower risk profiles over the long term, as they are less likely to face regulatory or reputational risks.
Additionally, companies that prioritise ethics and sustainability may be better positioned to capitalise on emerging market trends, such as the transition to clean energy or the growing demand for sustainable products and services.
Also, the increasing demand for ethical investing has led to new financial products and investment strategies prioritising ethical investing while seeking to maximise returns.
How can investors ensure their money is being used to support sustainable and socially responsible companies through ethical investing?
Research is the best way to ensure your investment funds go to ethical, sustainable and socially responsible companies. Investors should examine information and documents that tell them what specific companies have been up to.
Another way is going through news reports. In the age of the internet, it is easy for investors to find any negative news associated with the companies they would like to invest in.
The other way is using rating agencies. Several rating agencies provide independent assessments of companies’ performance surrounding sustainability, social responsibility and ESG. Investors can use these ratings as a starting point to identify companies that meet their sustainability and social responsibility criteria.
Lastly, they can monitor their investments regularly to ensure the companies they invest in meet their sustainability and social responsibility commitments. If not, investors should consider pulling their money and investing in companies that keep up with these commitments.
What are the key criteria for determining if an investment is considered ‘ethical’ or socially responsible in the financial industry?
The criteria investors use to determine this will vary from one to the next, but there are commonalities among ethical investors. The first is environmental criteria. These criteria include a company’s carbon footprint, energy usage, waste management practices, and natural resource usage. Investors may look for companies that have implemented environmentally friendly policies and practices or are committed to reducing their environmental impact.
The second is social criteria which focus on a company’s impact on society and its stakeholders, including employees, customers, and communities. Investors should consider companies that promote diversity and inclusion, respect human rights, and prioritise employee well-being.
The other is governance which refers to a company’s management structure and practices, including board diversity, executive compensation, and shareholder rights. Ethical investors should consider companies prioritising transparency, accountability, and ethical behaviour.
The three criteria – Ethical, Social, Governance – are known as ESG.
Investors should also consider avoiding investments in companies involved in controversial activities such as tobacco, firearms, or fossil fuels, or companies with a history of labour violations or environmental damage.
Some investors also consider the potential positive impact of their investments on society or the environment, such as investing in companies that produce renewable energy or promote sustainable practices.
How can ethical investing contribute to a sustainable financial future for both investors and society?
By only investing in companies and industries they deem ethical and sustainable, investors can push companies to implement more ethical and sustainable practices. By doing so, investors have the power to steer companies in the right direction, leading to a more sustainable and ethical financial future for everyone involved.
Ethical investment has been around for some time, but it is now gathering momentum. Many investors are using their morals and ethical values to include or exclude companies and whole industries from their investment portfolios.
