Through the ethical lens of investing

According to investing writer Alana Benson in an article for personal finance company Nerdwallet, “Ethical investing strives to support industries making a positive impact, such as sustainable energy, and create an investment return.”

Moreover, ESG – which stands for environmental, social and governance investment factors – “is gainingmore public attention” when it comes to ethical investing, reports business and economics journalist Emily Stewart in an article for Vox media.

Understanding ESG

Simply put, ESG investments “is a belief that you can generate meaningful, measurable, societal outcomes while also generating a healthy profit," financial planner and consultant Manisha Thakor tells media organisation NPR.

When looking at ESG more closely, Thakor defines it as: ?

• “Environmental: includes things like a company's use of energy, the way they deal with waste pollution and the treatment of animals.?
• Social: deals with issues like gender, diversity, and inclusion. It could also consider a company's charitable donations, contributions to the local community and worker conditions.?
• Governance: companies are avoiding conflicts of interest, not engaging in illegal practices and really being transparent in their accounting methods."In this way, ethical investing entails the financial strategy to gain profits from investing in registered companies whose ethical values correspond to your personal morals.

The risks and advantages

Firstly, if you are concerned whether ESG investing affects your potential returns, Benson reassures that “While no investment is guaranteed, the performance of ethical funds has been shown to be similar to the performance of traditional funds”. Additionally, companies adhering to good corporate governance – such as fair treatment of employees – and following socially responsible practices – such as waste management – “may also be better run and less prone to scandal” – thus ensuring a lower risk of loss of return.

Secondly, the Corporate Finance Institute (CFI) predicts that ethical investments have the potential to “substantially grow in the future” as more of the public begin investing. Moreover, as ethical investments gain more popularity, it will encourage more companies to “improve their ethical practices”to attract more investments.

However, Stewart warns that companies may claim they are ESG-friendly to gain more investments but are, in fact, not practising what they’re promoting. Thus, ESG investing “involves a lot of research to ensure that it aligns with the investor’s values and beliefs”, which could lead to higher fees for the investor, warns CFI.

Getting started

Benson states that building an ethical portfolio requires “a lot of time and effort to figure out how committed a company really is or which ethical practices they prioritize — time that you may not want to dedicate to researching stocks.” She advises using robo-advisors – online “robots” that use “algorithms to build and manage investment portfolios based on your risk tolerance and goals and, in some cases, your ethical preferences.”

Next, determine what companies with ethical practices you would like to support. Once you have found a company that aligns with your values, Benson recommends two types of investments – stocks and funds.

• “Individual stocks. It’s generally a good idea to limit the portion of your portfolio that’s in individual stocks, but if there is a company you expect will perform well over time, you may want to include it.”?
• “Mutual funds are a quick and easy way to diversify your portfolio, and there is a growing field of ethical funds to choose from.”
  
  

References:

1. Nerdwallet, (2022), What Is Ethical Investing and How Do You Do It?

2. Vox, (2021), The thorny truth about socially responsible investing

3. npr, (2022), Understanding the promises and limits of ethical investing

4. CFI, (2022), Ethical Investing