A Quick Guide to Ethical Investing

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A Quick Guide to Ethical Investing

There is a new investing trend and it is gaining ground.

Dubbed as ethical investment, sustainable investment or socially responsible investment (SRI), this refers to the process of seeking a financial return that considers the environmental and social impacts.1 In simple terms, it is investing with a conscience.

Technically, this type of investment has been around for sometime. In the United Kingdom, an insurance company started this type of investment in 1984 when they established an ethical fund that did not include companies that “harm the society.2

Forbes3 notes three ways in which ethical investing is done:

  1. Investing only in companies, organizations or governments with values aligned to that of the investor such as in terms of the environment, religious beliefs, consumer protection, human rights, among others;
  2. Shareholder advocacy in which investors can influence or reverse corporate decisions that will have negative impacts on their causes or on the environment and the society; and
  3. Community investing especially on underserved communities through microfinancing schemes, low interest loans and the like.

What you need to know about ethical investments

For regular people who want to invest their life savings in this manner, the all-important question is – will ethical investing pay off?

The quick answer, it’s a definite yes.

There is a growing recognition that failing to address environmental and social risks impact returns on investments. This is backed by a study done by the Morgan Stanley Institute for Sustainable Investing which found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. As an example, Morgan Stanley presented data that showed equal or higher returns from sustainable equity mutual funds over the last seven years as compared to their traditional counterparts.4 In addition, The Guardian reports that unsustainable businesses such as those that are engaged in oil, coal and gas stand to lose billions in the face of possible climate change actions and poor environmental records.5

A Quick Guide to Ethical Investing

So how can you get started in ethical investment?

Here are some simple tips to help you start ethically investing:

1. Determine what you want and how you want your ethical investment to grow.

The important thing to keep in mind – this is an investment. Research, study your options. Determine how much you want to invest. There are a lot of available ethical investment funds that you can look into. Find something that aligns with your values and your advocacies. The beauty of ethical investment is that it goes beyond profits. You can apply screening tools to steer clear of companies that are into businesses that you do not believe in.

A Basic Guide to Ethical Investing

2. Find an ethical fund manager to manage your investment.

If you are not confident of doing this yourself, it always pays to find an ethical fund manager. There are now a lot of fund managers that are into socially responsible investing. Find one that can help you navigate the complexities of screening out the “bad” companies. If in doubt, look for reputable ethical advisors’ organizations in your country. The United Kingdom, Australia and Canada, for example, have organizations that provide support toward this end.

Find a reputable ethical fund manager to manage your ethical investments

3. You can choose stocks, mutual funds or a combination of both.

Investing is about taking risks. If you are more of a risk taker, consider looking at ethical stocks or shares. If you’re risk averse, try some low risk mutual funds or bonds. You can even invest in a combination of both. For this, consult your ethical fund manager.

Since this is an ethical investment, also consider the companies where you are putting your money into. Does it promote the betterment of society? Does it work toward improving its carbon footprint? Will your investment allow you to have a say in corporate policies that may have adverse effects on society?

Ethical Investing- Does the company better or worsen society?

4. Manage your expectations.

Some ethical investments may take some time to yield positive results. This happens when compared with funds that can be virtually spent anywhere. However, the important thing to note here is that ethical investments are investments for the future. So while it may not perform as well as investments in the mining or oil and gas sectors, remember that these are not as sustainable as renewable energy, solar panels, etc. which are seeing a recent uptake in performance.

Ethical Investments- Invest in Clean Energy

5. Stay on top of your investment.

Always monitor your investment, even if you have a fund manager. It pays to see whether it goes to where you want it to go and if it contributes to the improvement of society. Keeping tabs on your investment will also allow you to see market trends and make appropriate adjustments where necessary.

We want to know: What do you think of ethical investment? Is this something that you will consider doing now or in the future? Or are you currently engaged in one? If so, share your experience. We’d love to hear your thoughts.

Show 5 footnotes

  1.  Australian Ethical. 2017. What Is Ethical Investment? Australian Ethical Investment. Available at: https://www.australianethical.com.au/what-is-ethical-investment/.
  2.  Gerner, Marina. 2016. How Ethical Funds Find Gems and Avoid Sin Stocks. Money Observer, 20 September 2016. Available at: http://www.moneyobserver.com/our-analysis/how-ethical-funds-find-gems-and-avoid-sin-stocks.
  3.  Chamberlain, Michael. 2013. Socially Responsible Investing: What You Need to Know. Forbes, 24 April 2013. Available at: https://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/#319834503442.
  4.  Institute for Sustainable Investing. 2015. Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies. Morgan Stanley Institute for Sustainable Investing, March 2015. Available at: http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf.
  5.  Jones, Rupert. 2015. Thinking Ethical Pays Off As Good Guys Come Out on Top. The Guardian, 17 October 2015. Available at: https://www.theguardian.com/money/2015/oct/17/ethical-funds-green-investments-coal-oil-gas.

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