Ethical Investing: Supporting Your Beliefs Can Turn Into Your Profits
With ethical investing, you can earn profits and feel good about where they came from.
Contributing Writer at Tally
February 25, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Whether you want to earn a little extra profit from idle cash or you’re looking to retire, investing in stocks, bonds, mutual funds and exchange-traded funds (ETFs) can help you reach your financial goals. But the issue some people have with investing is — in order to maximize profits — they might have to make investments in companies they don’t consider ethical.
Fortunately, ethical investing has recently come to the forefront, giving investors the ability to look beyond just a company's profits. With ethical investing, you can see how companies act and contribute to the greater world and choose to invest in one that aligns with your own ethics.
But what is ethical investing, how does it work and is it safe? We cover all these lingering questions and more below.
What is ethical investing?
Ethical investing means using your ethical principles as a primary factor for choosing an investment. Since each person's ethical views and priorities differ, this leaves the term open for interpretation.
For example, a person who prioritizes climate protection is more likely to invest in an eco-friendly company. However, a person focusing on social justice may prefer to invest in a company with a track record of standing up for equality and justice.
In short: it's socially responsible investing through the investor's eyes.
The hope of this investment approach is gaining a financial return while also making a positive impact on the causes the ethical investor cares about.
With such a broad meaning, ethical investing can cover just about any topic, but some popular ethical investment criteria include:
Many ethical investors will review a company's environmental, social and governance (ESG) — or overall corporate consciousness — when making investment decisions and deciding what stocks or mutual funds to add to their investment portfolio. And it's often a significant part of their investment strategy, more so than simply making profits.
This is why ethical investing is also sometimes referred to as ESG investing.
How does ethical investing differ from traditional investing?
In traditional investing, investors give little thought to corporate ESG. These types of investors choose investment products based on financial potential and past performances. So, if there's an opportunity to make a profit, they will invest in the company, regardless of its corporate governance.
This investment process leaves the investor open to making additional money, as there are more investment options. However, for someone looking to build an ethical portfolio, simply profiting isn't sufficiently satisfying.
How can you make a difference through ethical investing?
When you invest in a company, you're putting a portion of your money behind the company and saying you trust it to earn you returns. This is great, but there are even bigger impacts you can make while turning a profit through ethical investing.
With ethical investing, you're backing a company with a belief system that aligns with yours, whether that's reducing fossil fuel reliance, supporting social justice or being a proponent of important environmental issues. It is a win for everyone involved. You put your money behind a company you believe in, the company gets funding to help it grow, and your investment will help expand the reach of your personal values.
On top of all this, given you perform sound research and choose an investment with solid financial potential, you may see your investment grow.
Is ESG investing safe?
With proper research and an investment manager who can marry your ESG factors with stocks and funds with strong financial performance, you can turn a profit and feel good about doing so. With this approach, you're not only a shareholder in a company you believe in, but you can also earn great returns.
Companies like Morningstar offer financial services that help ethical investors choose ESG funds, stocks, exchange-traded funds (ETFs) and more while limiting the obvious ESG risks.
But remember, with any investment, there’s the risk of losing your entire investment. With the help of a financial advisor, you may be able to achieve sustainable investing while mitigating loss risk.
How to choose the right ESG investments for you
The biggest part of getting into ESG investing is finding what companies and ESG funds may be right for you. You can do so by going through the ESG categories and choosing those that are important to you. These areas are as follows.
Green building and smart growth
Climate change and carbon reduction
Health and wellness
Corporate political donations
You can choose just one ESG criteria or reach a broader spectrum of investment opportunities by choosing several. You can also invest in ESG funds, which are made up of investments chosen by a fund manager based on ESG criteria.
According to Forbes Advisor, the most popular ESG funds and ETFs include:
Vanguard FTSE Social Index Fund
iShares MSCI USA ESG Select ETF
Parnassus Core Equity Investor
iShares Global Clean Energy ETF
Shelton Green Alpha Fund
1919 Socially Responsive Balanced Fund
AllianceBernstein Sustainable Global Thematic Fund
Keep in mind, while the above ESG criteria are widely used by fund managers to design various ethical investment vehicles, as an investor, you can choose what you deem to be ethical and mold your investment strategy around your unique belief system.
Can you also exclude certain actions?
Yes. Exclusionary investing is a great way to bring your beliefs front and center. For example, if you want to focus on health and wellness, you can seek funds that filter out tobacco and alcohol companies.
You can also be exclusionary when choosing individual stocks to invest in. For example, if you’re a firm believer in labor rights, you may want to exclude companies known for running sweatshops or offering substandard maternity and paternity benefits.
Invest in your beliefs for potential returns
Investing in the stock market is traditionally about money, money, money. But, with more understanding of the greater impact companies’ choices can have on our daily lives, ethical investing has become more popular.
Ethical investing is about choosing investments that can not only earn you profits, but also make you feel good about investing. It takes time, research and the ability to look beyond the dollar, but it can be a rewarding process that leaves you satisfied with a healthy investment portfolio.
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