Home Invest Ethical Investing: Overview, Approach, and Guide [2021]

Ethical Investing: Overview, Approach, and Guide [2021]

by Team Finance Meaning
Ethical Investing

Want to invest money but are confused about whether the industry aligns with your ethical or moral principles or not? First of all, thanks because you’re not considering investing in a sector involving stigmatized activities and leaving negative impacts on society.

Take a deep breath because this article is a gold mine for you. Below we’re going to share everything about Ethical investing, its pros, cons, types, and a brief guide about how you can invest ethically?

Ethical Investing: Overview

According to ethical investing, an investor invests only in a business that does not work against his moral principles. We’ll make it more clear further in this post, so keep reading.

According to the Global Investor Study, almost 47% of Americans want to invest in sustainable investment funds. The value of Sustainable or ethical investment is growing gradually. It has reached $35.3 trillion in 2020.

What Is Ethical Investing

Every person has a moral sense; we all are sensitive towards some issues. In simple words, If a person thinks that a particular industry is harmful to the environment. In that case, he will not invest in the industry. It’s the concept of ethical investment.

Definition

Ethical Investing is a way of investment. It is when a person does not invest money in any business, brand, or industry whose products or motives are not noble and are against moral principles.

However, know that what is ethical or unethical depends on the investor. There is a possibility that if something is unethical to you, it may not be to someone else.

History

Ethical investing has a rich history. Apart from moral values, religion also motivates and supports ethical investing from ages. In the U.S, it starts in the 17th century with Methodists. The founder of Methodists, John Wesley, writes a book and “The Book of Discipline” and instructs Methodists to avoid investing in companies or industries involved with stigmatized activities.

Religious Society Quackers also stops members from investing in alcohol, tobacco, gambling, weapons, slavery, etc. The Quran also has rules known as Shariah Compliance about investing.

Though religion motivates people to invest ethically, it does not mean that only religious people think about ethical investing. Especially nowadays, ethical investing is more about the moral principles of a person, not religion.

Ethical Investing Sector

Though not all investors think of ethical investing and invest in any industry, still, many people are interested in ethical or sustainable investing. According to a study, Millennials (the generation born between 1980 – 1996) often or always invest in ethical investing.

Also, 72% of people who don’t think about ethical investing now believe it is essential. The prevalence of ethical investing and its value is growing day by day.

Types of Ethical Investing

There are five different types of ethical investing, which we’re going to discuss below.

Socially Responsible Investing Funds (SRI Funds)

Socially responsible investing funds (SRI Funds) means investment for companies that do not negatively impact the world or society. In more simple words, investment in a business does not work against the moral values of investors.

For example, a person who’s sensitive about smoking, pornography, alcohol, etc., and wants to do something to stop it. He will never invest in the industry that supports them.

Instead, he’ll invest his money in a company that has a positive social impact, such as education, solar energy. So the investment in Solar Energy companies or education is Social Responsible Investing.

Environmental, Social, and Governance Funds (ESG Funds)

ESG funds mean (Environment, Social and Governance funds) portfolios of bonds, share stocks in companies that do not go against the criteria of ESG.

ESG criteria are about the impact of a company on the environment, governance, and socially. In short, investing in a company or business after considering the financial returns and the impact on the environment, society, and governance is ESG criteria.

Impact Funds

Impact funds mean investing in an industry that has good social and environmental impacts alongside high profit. This type comes in when a person invests in healthcare or solar energy because they are beneficial for him (as he’ll get profit in returns). It’s also beneficial to society and the environment.

Faith-based Funds

Faith-based funds mean an investment that does not work against the religion and faith of investors. Every factor of this investment type needs to be considered for the investors, managers, and company itself. 

For example, if the religion of the investor does not support gambling, alcohol, etc. He does not want to invest in these companies. Instead, he wants to invest in stocks of another company because it aligns with religious beliefs; it is a faith-based investment.

Investments based on Political Values

Similar to faith-based investment, you can also invest your money according to your political values. In simple words, investing in a company or business that supports, promotes, funds your political views, and does not work against them, is called an investment based on political matters.

Advantages of Ethical Investing

  • You don’t have to go against your morals and ethics for investment.
  • You can generate high-profit with ethical investing.
  • Your investment can’t hurt society or the environment.
  • You can also go for faith-based investment if you want to invest in a company that does not go against your religious values.

Disadvantages of Ethical Investing

  • The most notable disadvantage is, it minimizes the investment options. 
  • You’ve to research a lot before about the company to ensure that it aligns with your moral principles and beliefs.

Steps To Invest Ethically

After reading the ethical investing pros and cons, you may be thinking about the procedure of ethical investing. Don’t worry; you don’t have to spend your time finding the answers to your queries separately. Below we’ll share with you a brief guide and ethical investing tips.

Understand Your Values

First of all, you’ve to think and understand yourself. Realizing after investment that the company works against your moral values means you’re in a dire strait.

So, hold a pen and paper and write down the companies or industries you want to avoid. Make a list of the businesses involved in stigmatized activities.

For example, if you want to avoid companies that use animals for testing, note it down. Never invest your assets in such firms.

Find Out Where Your Money Is Already Invested

Now, it’s time to research your previous investment. Check out where your money is already invested and find whether it aligns with your values or not. You can check about the company where you invested through the website or on Google.

Do Your Homework

It would be best if you always did your homework before investing anywhere. Realization after the investment is not a good situation for investors. Your homework is research; it is the only way to find out about the returns and risks.

Yes, it is a time-consuming task, but it’s not difficult as it seems. After all, you can find everything about a company through websites and social media.

Know Where You Can Invest

Learn where you want or can invest, whether it is stock, mutual funds, etc. If you think mutual funds suit you better, then start your research about mutual funds. You can choose anything to invest in as long as the particular company’s funds do not work against your ethics and values.

Plus, if you face any difficulty, you can consult with an ethical investing expert. You can find many experts that can help you through Google or social media platforms.

Create A Plan and Stick To It

After choosing the industry, business, and investment type, it’s time to create a plan, set your goals, think about the returns, investment type, market, and create an asset allocation plan. And remember, stick to your plan.

Monitor Your Investments Regularly

The last thing an investor shouldn’t forget is monitoring. Check about the returns and your investment. Find whether they are working according to your plan or not.

Frequently Asked Questions (FAQs)

What are examples of ethical investments?

These are the examples, or we may say, types of ethical investing.

  • Social responsible investing funds (SRI Funds)
  • Environment, Social, and Governance Funds (ESG Funds)
  • Impact Funds
  • Faith-based Funds
  • Investment based on Political Values
Are ethical investments suitable?

Yes, ethical investment is suitable for anyone who wants to invest and doesn’t want to fund anything against his moral values, environment, or society.

What is the difference between ESG and ethical investing?

First of all, ESG is a type of Ethical investing. ESG and ethical investing both are the criteria for the companies and businesses. In ethical investing, the investor thinks about his principles, ethics, and values. While in ESG, he’ll think about the environment and governance along with the social effect of investment.

Does Vanguard have ethical funds?

Yes, vague offers many Ethical funds. You can invest in these funds without worrying about your moral values, beliefs, and principles.

What are the disadvantages of ethical investing?

The disadvantages of ethical investing are:

  • You can’t invest in any company or industry.
  • You’ve to research a lot before investing.
Does ethical investing make a difference?

Yes, it makes a difference; not only do investors get high returns, but it is also suitable for both society and the environment.

Final Comments

No doubt, ethical investing is the best way to invest and earn for good. You’ll get financial returns along with the peace of mind that your money is not being used against society and the environment.

Hopefully, you have got almost all the information you need about Ethical investing. But if you still have any questions in your mind, you can ask in the comment section.

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