What is ethical investing?

Ethics –
Moral principles that govern a person’s behaviour or the conducting of an activity.

Everyone has their own set of ethics. Beliefs that you hold close… principles that you live by every day. Your ethics influence all sorts decisions you make during your life… from something simple like the brand of tuna you buy in the supermarket through to the type of car you choose to drive.

Your culture, your family and friends… the people you spend time with, all shape the development of your beliefs. As you get older, different issues can become more important to you, and your ethics can continually evolve.

As ethical issues such as climate change gain attention in the media, more people are considering the impact of their investment decisions. Ethical investing has been named a major trend in the financial industry in 2019.

Ethical investing

Ethical investing

The term ethical investing is derived from the process of using your ethical principles to help you determine the specific investments you select. Obviously, this type of investing completely depends on your own views and can result in a highly personalised portfolio.

Religion has traditionally had a significant influence over ethical investing. Some of the earliest recognised examples of ethical investing date back to the 18th century when Quakers in America opposed investments in the slave trade and Methodists preached not to invest in businesses that could ‘do harm to your neighbour’.

In the modern era, ethical investing is more closely linked to social views rather than religion. It now tends to reflect political or social trends and has certainly shifted towards environmental issues over the last few decades.

Socially responsible investing

Socially responsible investing

The phrase ‘socially responsible investing’ relates to the type of business or industry the company is involved in. It is common for these types of investments to avoid companies that sell or manufacture potentially addictive goods or services like gambling or tobacco. Alternatively, they look to invest in companies that are involved in sectors such as clean technology, alternative energy, environmental sustainability or social justice.

As with any investment there is the desire for financial gain. And while several studies have shown that some ethical investments can outperform other mainstream products, there’s no guarantee socially responsible investing will result in good returns.

Yes, the social impact is a positive aspect, but investors should still fully consider the financial fundamentals before assuming an investment will produce a favourable result.

With increased awareness of environmental issues and climate change, much of the socially responsible investing done in recent years has favoured companies that are involved in emission reduction or clean energy development.

Green investing

Green investing

The next step up from socially responsible investing is green investing. These types of investments lean towards companies that are truly dedicated to specific action such as environmental conservation or the development of a clean water project. They would fit the criteria to be classified as socially responsible, but they are much more specialised in their activity.

While their actions are focused on achieving positive results, the concern for investing in these types of companies is that they tend to be in their development stage, so there is no clear indication of a significant return. An investor would need to make this choice understanding the potential risk. This type of investment is often motivated by a desire to support an eco-friendly project.

Ask your adviser

There is a lot of information that can be confusing when you are trying to determine the nature of investment products… this is where we recommend speaking with your financial adviser. They can help you navigate the options available and together you can clearly define your goals.

If you would like to speak to one of our team, please contact us today. Read another investments article.

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