Ethical investment: what it is and why it matters
01/02/2022
Ethical investing is an approach to investment wherein strong moral and economic values are upheld as a primary objective within the strategy, along with, of course, positive financial returns. By building an ethical strategy around your investments, you seek to create social, environmental and economic value that is sustainable by its very nature.
As the onus continually shifts further towards the social responsibilities of businesses and corporations, ethical investment – also dubbed the “investor revolution” – is becoming an increasingly hot topic. So, what exactly does ethical investment look like and why does it matter?
What form might an ethical investment take?
There are a number of ways that you may approach investing ethically. Below, we’ve taken a brief look at a handful of popular, ethically sound investment strategies.
1/ Socially Responsible Investing Funds (SRI’s)
SRI funds steer away from directing investment towards controversial industries and the moral values of the investor are paramount to the fund strategy. An SRI fund would never invest in areas such as oil, alcohol, firearms, gambling, tobacco or palm oil, if the investor’s moral belief system stood in opposition. Generating a profit over time is, of course, still important, but must be mindfully balanced against principles.
2/ Impact Funds
For those who want to place equal importance upon both the social and environmental values of their investment, as well as on the success of their returns, impact funds are a sound option. An impact fund is one with a specifically defined social or environmental objective that is measured and tracked in its progress, such as expanding employment opportunities within a specific community. This is becoming an increasingly popular investment model for high net worth individuals who are socially and environmentally conscious yet keen to meet their financial objectives.
3/ Environmental, Social and Governance Funds (ESG’s)
ESG funds focus on making sustainable investments whilst maintaining the strength of returns that can be expected with standard investment approaches. ESG funds factor in a consideration of how environmental, social and governance risks can entail material impacts for a business or corporations’ performance and stability.
4/ Faith-based Funds
Faith-based Funds are those which position the religious ideals and values of the investor as paramount. Those investments which do not fit within the religious belief system of the investor are inherently strictly excluded.
What are the benefits of ethical investment?
If you’re a socially and environmentally conscious individual, making ethical investments can allow you to benefit both emotionally and financially from your investment strategy.
As ethical investing continues to gain attention, businesses, corporations and organisations alike are encouraged to up their CSR game in order to attract funding from a wider pool of potential investors. As organisations under pressure from ethical investors continue to invest time and energy into creating a more conscious and positive working culture and more sustainable production practices and objectives, the world becomes a better place for both workers and consumers alike.
A great deal of research also points towards the financial risks posed to corporate value chains by environmental degradation and climate change. Companies in the Food and Agriculture industries have been identified as particularly vulnerable to the risks associated with the climate crisis, as well as, of course, corporations within the Energy sector.
It is therefore firmly within the interests of all businesses who want to plan for a secure future to begin considering their environmental responsibilities in particular. Ethical investing helps to place the necessary pressure on businesses to do exactly that, by contributing to the increase of awareness vis-à-vis climate insecurity.
Ultimately, ethical investment strategies value the importance of gradually growing a world that is a better place for all, wherein sustainability and profit can exist side by side in harmony.
Are there any disadvantages to ethical investment strategies?
Whilst ethical investing may appear, on the surface, to be an entirely positive approach to capital gain, it is, of course, a little more complicated than that.
A key concern to note is that, by boycotting investment opportunities in companies with poor ethics, those companies do not simply disappear. Rather, they may actually continue to grow and flourish. This can happen as the growing prominence of ethical investors reduce the pool of potential shareholders, which can in turn lower the price of the stocks. Lower stocks only make the company more attractive to investors who do not lead with ethical principles, leading to growth.
In conclusion
Whilst, like any investment strategy, ethical investment strategies such as SRI’s and EFG’s can be a little fraught, they can provide a great option for investment. Ethical investing may oftentimes come at the cost of lower or slower returns on your portfolio, but the addition of other benefits may make this worthwhile in the eyes of many.
Overall, ethical investing is a positive option for those looking to make financial returns that do not compromise on their moral and ethical belief systems. Ethical investing is, of course, not a strategy that is going to solve the world’s ills overnight. However, it’s growing prominence goes a fair way to creating a world wherein businesses, corporations and organisations are held more morally and ethically accountable and are encouraged to adapt to a greener and more socially conscious future.
Are you ready to take the next step? Our financial advisers can offer you support throughout your ethical investment journey. Contact us today to find out how we can help.