If you want to invest but are concerned that your funds will end up supporting the industries that don’t stand with your principles, you might have to consider ethical investing. The goal is to align your moral compass with your investment portfolio. Ethical investment involves strategies where investors choose investments based on a personal ethical code. The whole point is to support industries making a positive impact, such as those working on sustainable energy, and create an investment return.
Interestingly what is “ethical” will depend on the individual. What is ethical to one might not be to another person. Therefore, it is essential to look behind the scenes at ethical investments and make sure everything aligns with the impact you would like to have. There are a few variations when it comes to ethical investing, such as sustainable investing, socially responsible investing, green investing, impact investing, and ESG investing. However, they all involve the same idea of creating positive change by thoughtfully and intentionally investing your money.
Name Used Interchangeably
The above names for ethical investing methods are often used interchangeably without much consideration on which are exclusive, inclusive, or both. The difference comes in how they achieve the idea. Some will only include positive-impact investments, while others will exclude negative impact investments. However, others will use both inclusionary and exclusionary methods. For example, some funds will exclude investments in tobacco and firearm companies and term the portfolio “sustainable” or “socially responsible” however, without including any “sustainable” assets. It is important to understand a fund or advisor’s methodology for choosing investments based on this fact.
You need to note that most ethical investing strategies, regardless of their names, will use ESG investing factors (environmental, social, and corporate governance) to grade specific investments along an ethical curve. This means that a fund creating an impact fund portfolio focusing on social justice will consider investments that receive a high ESG score in the social category.
Is It Possible To Make Money Investing Ethically?
While returns on investment are never guaranteed, the performance of ethical funds is similar to that of traditional funds. In fact, some research has shown that ethical funds may be superior. For example, data collected by Morningstar indicates that sustainable funds outperformed their traditional peers in 2019, with 66% finishing that year with returns in the top half of its categories.
The general consensus is that companies that treat their employees well care about environmental impact and may also be better run and less prone to a scandal, which can aid stock performance. For example, such companies can avoid fines and lawsuits when it comes to mismanagement of toxic waste disposal, sexual assault, fraudulent transactions, and harassment charges since they may have policies to help avoid those issues in the first place.
Also, some evidence suggests that ethical funds can offer lower levels of market risk than traditional funds even in volatile markets such as the downturn during the first few months of the Covid-19 pandemic. Data collected by Morning star shows that 24 out of 26 ESG index funds outperformed comparable conventional funds during the first quarter of 2020.
Tips On How To Build An Ethical Investment Portfolio
You can consider a few things when starting to build an ethical portfolio, such as deciding how you want to be involved. You can opt to pick various investments you feel meet your ethical standards and monitor them over time, or you can get some help. This is where Robo-advisors come in. They use algorithms to build and manage investment portfolios based on your risk tolerance and goals and, in some cases, your ethical preferences. Also, they are cheaper than traditional advisors.
Also, it would help to determine what is ethical to you before getting started. For example, would an oil company still count as “ethical” to you if it has robust environmental initiatives, or would you rule investments in oil out entirely?