Yes. Well, that was a quick article. But, I will try to elaborate about the concept of ethical investing and its benefits a bit more in this post.
The state of the world bears pretty heavily on my mind. I don’t feel comfortable gaining from something that has a negative impact on other people or the planet. This put me off investing for a long time, as the public image surrounding the stock market presents a negative image of those profiteering from others’ misfortunes.
This doesn’t have to be the case. I discovered sustainable investing. This allows you to align your morals to your financial goals. Hopefully, it will allow you to make money while contributing to improving society as a whole.
Investing ethically has grown hugely in popularity in recent years and is now more accessible than ever. It’s become a large topic, which I hope to break down in this post.
I will cover:
- What ethical investing actually is
- What ESG is
- How ESG investing differs to normal investing
- The benefits of investing ethically
- How to get started on your ethical investing journey
What is ethical investing?
Ethical investing refers to the practice of using your ethical principles as the primary filter for choosing which securities to invest in. It is the practice of selecting investments based on ethical or moral principles.
The idea is to invest according to your morals and not just look for the best returns. Although the two don’t have to be mutually exclusive; ethical investments can produce good returns.
It’s a very simple concept and, in some ways, it seems strange that there’s another way to invest. However, many still think it’s not normal and don’t consider the environment or any other ethical concerns when investing.
What is ESG?
ESG stands for environmental, social and governance. More specifically, it tends to refer to environmentally friendly funds or funds that aim to bring about social change. The term is used to refer to ‘green’ investing.
However, its scope is quite broad. A prominent wealth manager once told me “all investments should be ESG. A company with poor governance would be a bad investment.”
This has led to significant backlash as tobacco, arms companies and even oil firms were found to be in ESG-labelled funds. Technically, all these industries could fit at least some of the ESG criteria, demonstrating why it’s so important to do your research first, rather than being drawn to the ESG label.
How does ESG investing differ to normal investing?
In the future, I believe there won’t be a distinction between the two. But for now, there are still some differentials.
Traditional funds don’t exclude companies because of what they produce, their ethics or their impact on the environment. Instead, they look for companies that look set to perform well over the next few years.
On the other hand, ESG investors will take all of those things into consideration, while still looking for high performing companies that will deliver over time.
The exact differences will depend on the individual investor and whether they’re looking for firms that tick all three (environmental, social and governance) boxes or just one of them. Clearly, the tougher the criteria imposed, the harder it is to find suitable companies to invest in. However, the rewards are worth it, particularly when you see a positive change and positive returns.
The benefits of ethical investing
Many believe you have to sacrifice returns to invest according to your morals. If this ever were the case, it almost certainly is not anymore. If there is a difference, it is negliable, particularly over the long-term.
Research from Morningstar actually found the majority of ESG funds outperformed the wider market over 10 years. “ESG factors are not just ‘nice to have’ but drivers of outperformance,” Jan Erik Saugestad, chief executive of Storebrand Asset Management, told the Financial Times.
Aside from your own bank balance, there are also external benefits. These differ depending on what you choose to invest in, but you can be confident your money is not making the world a worse place. In fact, you may actually help make it a better place.
Ethical investing can be a good way to make a positive change and contribute to social causes you care about. There is a school of thought that argues impact investing can have a greater benefit than philanthropy. Investors are more engaged when they have a financial stake in the project, which can lead to the project being more successful overall.
How do I go about investing ethically?
There are plenty of ESG options available now, making it easy to invest in them. But, this has led to some claims of ‘greenwashing’ – funds that label themselves as ethical, but in reality are not.
Therefore, as with any investment, it’s really important to do your research. Consider which issues are most important to you: climate change; paying staff fairly *cough Boohoo cough*; equality or something else?
Once you’ve established which issues you want to prioritise, then you can start looking at funds and/or stocks which match those values. Many companies have specific ESG funds, which will help this process. For example, Rathbones and Vanguard have successful ESG funds, both popular with investors.
If you’re nervous about changing too many of your investments at once, you could start by moving your pension to an ethical fund. Most providers have this option and it’s a really easy change to make. I moved my workplace pension to a sustainable fund in the space of about five minutes.
In a later post I will discuss the differences between impact investing and philanthropy and discuss which may be the best option for you.
If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences about investing, so please do leave a comment! Do you try to invest ethically? If you want to read more content like this please sign up to my mailing list and/or follow me on Twitter @Katie20Percent