The concept of ethical investing has been around for many years now and, like a number of other “sustainable” movements, has gone from being regarded with a combination of suspicion and amusement to being not only mainstream but increasingly popular. With that in mind, here is a brief guide to what you need to know about it.
There is no universal definition of “ethical investing”
When you start out on your ethical investment journey, you will not only have to take a decision on what ethics means to you, but you will have to take a decision on the extent, if any, to which you are prepared to tolerate unethical behaviour. You are also going to need to decide how long you are going to give a company to prove its credentials. For example, let’s say that you have found a company which used to be very poor in the areas of environmental protection and worker protection. Over the last 5 years, however, it has really cleaned up its act and has made substantial improvements in both areas to the point where it now has exemplary worker protection and very decent, although not yet exemplary, environmental protection. Where do you stand here and why?
You may find it challenging to use investment funds
As previously mentioned, the issue of ethics is entirely subjective and so each fund will have its own interpretation of the term, along with a policy on how much tolerance they will extend to companies which fall somewhat short of the highest ethical standards. You will therefore need to make sure to read the “small print” and understand it thoroughly in order to take an informed decision on whether or not the ethics of the fund are in line with your personal ethics. It has to be said that you may find this more of a challenge than you might have expected, particularly if your main concerns are the environment and/or worker protection. Traditionally ethical funds have automatically excluded investments relating to tobacco, the arms industry, gambling and adult entertainment. While the first two are very likely to be automatic nos for anyone remotely interested in environmental protection, the latter two are not necessarily harmful to the environment and can actually set very high standards in worker protection and so the decision as to whether or not to include them in an investment portfolio is really more about a person’s own views of these industries than their impact on the environment and/or their workers.
Ethical investment can be about inclusion at least as much as exclusion
Looking at the preceding paragraphs, you could easily be forgiven for thinking that ethical investment was all about creating a “naughty list” of companies to avoid. There is a certain degree of truth to this, but, in and of itself, it can make ethical investing seem like a very negative concept, whereas in actual fact, it can be a very positive one, which rewards companies which do aim to behave in an ethical manner. In other words, instead of just thinking about what you want to avoid, think about what you want to support and look for investments which will promote your ideals.
Remember that ethical Investments are still investments
If you wish to succeed as an ethical investor, you will need to apply standard investment principles and practices to your investment strategy. Doing so will allow you to weed out companies which have essentially jumped on the “green bandwagon” to hide their fundamental deficiencies and to focus on companies which genuinely deliver sustainable value while operating in an ethical manner.