One of the most solid pieces of advice for the young generation is to build financial freedom by investing in stocks. But as the population is becoming more savvy on business practices and other social issues, there is a growing trend towards ethical investing. For a growing number of people, the “how” of a company's profits is just as important—if not more than—as the “how much.”

Similar to ESG investing, ethical investing (sometimes called socially responsible investing) follows a similar investing philosophy though has some nuances to it. Delving into the world of sustainable investing isn’t complex, however, and anyone can pick up on it quickly.

Ethical Investment Meaning and Types

Ethical investing can be best summarized as investing based on your personal values or ethical principles and moral compass. Going back to what was said above, it’s a combination of looking at how much a company is making but also how they are generating that revenue.

It’s these basic principles that give ethical investing it’s socially responsible investing tag. After all, as an investor, you’re looking to make a return from the investment, but do so in what is a morally good position.

For example, ethical investments can look like investing in green energy or a company that uses that energy in production over a company using primarily fossil fuel. Another example would be ethical investing in crypto.

Ethical investing also has various methods which can determine how you’ll invest. There isn’t one specific method that’s better, as each method has its benefits. It varies more on one’s personality and financial values and goals.

ESG Criteria For Ethical Investing

Short for environmental, social, and governance, these three criteria are becoming a more standardized method thanks to regulatory efforts. Adopting environmental, social, and governance criteria is a good basis to build an investing philosophy since it looks at a company’s metrics in three areas that have nothing to do with profit.

The pillars of environmental, social, and governance, or ESG, are as follows:.

Environmental

You would consider how much a company contributes to climate change via several methods. From carbon emissions on all levels (production and shipping) to water usage, energy policies, and how much effort they are putting towards being sustainable, this criteria looks into how the product or service is really done.

Social

This criteria factors in both internal and external factors. You’ll look at how much a company does for the community it’s located in and around the surrounding area. Furthermore, you’d check how well the company treats its employees. This is an area where you’d look at diversity and inclusion practices, or DEI, human rights programs, fair labor practices and community engagement.

Governance

In particular, this criteria looks at how a company is managed at the very top. You’d look at board members, the diversity in leadership, executive salaries, audits, internal controls, and oversight that the company has placed. Another way to think about governance is to ask, “How transparent is this company in terms of operation?”

Thematic Investing

Focusing on profitability, this style of investing ethically also considers certain parameters. The themes are generally broad rather than specific methods. For example, thematic investing can look like investing in companies that have fully transitioned or partially transitioned to renewable energy. Others can look at the make-up of company boards and employees.

Shareholder Activism To Encourage Ethical Investing

Another approach to ethical investments is shareholder activism, which looks more at the bigger picture of a stock. While a stock ensures a return on investment, it also means one can participate in where the company is going. Because public companies have open calls for their shareholders, shareholders have the opportunity to vote on various issues of importance to the company.

This can include ethical practices.

This ethical investing style is more focused on corporate responsibility over the other two, as it focuses on an investor gaining power to influence how a company should operate. Where you invest will be based solely on how strongly you want a specific company to pay attention to a specific issue you care about.

Picking Your Own Stocks

While it’s a time-consuming process, one option to guarantee satisfaction is picking your own shares or bonds based on your values and beliefs. 

This isn’t an ideal option for first-time investors, as it would require digging into multiple financial disclosures, ethical fund details, and compiling your own detailed reports. This is in addition to tracking all that information.

However, it is the most satisfying socially responsible investing method since you get what you want. After all, actively managed ethical funds or any typical investment strategy could have some flaws to it.

To get the most optimized without any compromise ethical investment strategy, it’s something you have to do yourself.

Ethical ETFs

Also known as an Exchange-Traded Fund, this form of ethical investing is more passive. It’s designed to replicate the performance one would expect from an index fund. They are often cheaper alternatives since they’re not actively managed.

The funds themselves would filter out companies that aren’t aligned with the funds values (such as gun manufacturers or tobacco companies) and you’d be simply investing in that collective whole. With the ethical tag on it, companies could be further filtered to look at ESG metrics and carbon footprint too.

How Large Is The Ethical Investing Sector?

With various ethical investing methods, it’s fair to say that ethical investments make up a large portion of the investing world. A Bloomberg report showed in 2022 Global ESG assets could surpass $41 trillion by that year. Bloomberg also predicted ESG assets could exceed $50 trillion by 2025.

Currently, a lot of the ESG assets are situated in Europe. Since 2018, Europe has been pushing for ESG for some time on the world stage and domestically. Between forcing companies to comply with mandatory disclosures and hefty fines for greenwashing, among passing more regulations and laws, it makes sense Europe is reaping the benefits from this.

However, other countries are catching up. The United States was predicted to exceed $20 trillion in 2022. Beyond that, the general consensus of the public in the United States and Canada is warming up with some of the general public getting into investing in this way in the next few years.

All around, the ethical investments sector is growing as we become more concerned about the environment and are working to make businesses more accountable of their actions.

How Do I Invest Ethically?

Investing ethically has several considerations you have to account for. Some of it hinges on the particular method you want to invest ethically in, but here are some pointers to help you hone in on.

Determine Your Values As An Ethical Investor

While investing is all about the numbers, to invest ethically, you’re putting a human element to it. For the first time, non-financial incentives are encouraging financial decisions. It’s easier this way for anyone to get involved since the primary goal isn’t always about the money.

It’s a human element that anyone can relate to and get behind.

So it’s key to lean into that and pay attention to the human elements of a company. This extends to sustainable funds, exchange-traded funds, and so on.

This can be a tricky element, as there are hard ethical questions to consider with no obvious answer.

Do you think you’d be able to invest in an oil company that is actively working to switch to renewable energy?

Could you invest in a car company that is making the same amount of electric vehicles as it makes in fossil fuel cars? Note that electric vehicles were more meant to reduce the use of vehicles on the road, not replace the existing cars with electric ones. They require six times the mineral output of regular cars.

Could you invest in a fast fashion brand releasing more sustainable fashion brands and looking to clean up a lot of the damages the fashion industry has placed on the planet?

There’s a lot of questions to weigh, as each company isn’t purely good and bad. Some companies are doing better than others, but they may still have some things you might not agree with.

What really helps with all of this is figuring out your values in all this. Keep an open mind, as reality is difficult and you might not find a fund or many companies that fit exactly the way you want them to.

Pausing and reflecting as a start is smart.

Determine Where Your Money Is Already

A good starting point for those already into investing is checking where you are investing already. Whether that’s through a company pension, an index fund, actively managed ethical funds, or through a financial advisor, knowing where you have your money in can help you make quick decisions.

Beyond knowing where that money is specifically, you also want to be determining whether these companies align with your values or not. Do these ethical funds you’re dealing with truly funds you want to be dealing with?

Once you found your answers, it’s making changes in those investments based on them, either from an individual business, new ethical funds or with a new investment provider.

Always Do Your Homework

If you’re looking at an investment firm, look into the products they provide. Check out what other people think of them and whether they’re making a genuine positive impact. Look at the sort of portfolios that investors have. We keep track of several companies through ESG Company profiles. Furthermore, we have several ESG featured profiles.

Beyond that, looking at the companies that are being invested in doesn’t hurt either. Even in actively managed ethical funds, where changes are being made so quickly, it helps to know where money is being settled.

Be Mindful Of Greenwashing

This is when companies present eco-friendly characteristics but are actually misleading people. An example of this Coca-Cola made the claim that its plastic water bottles are “100% recycled.” When there were two complaints from different environmental groups, the European Commission looked into it.

Sure enough, it found the recycling claims to be false.

But even ethical funds themselves indulge in greenwashing as well. Going back to electric vehicles, some ethical funds can claim they helped “reduce carbon emissions” by pointing at car companies switching over to electric vehicles. Meanwhile, car companies that are part of that fund could’ve made the decision to produce fewer cars altogether.

Overall, checking headlines from companies you’re investing in can help you figure out whether the companies themselves and the funds backing them are making genuine changes or are sustainable.

Knowing The Ethical Investment Vehicle Options

As mentioned before, to ethically invest in something comes down to the vehicle that you wish to use. Each one has pros and cons to them but all of them leave some level of positive impact. Spending some time figuring out the best method to invest in yourself while investing in everyone else’s future is a delicate balance.

Having A Plan And Sticking To It

Lastly, incorporating ethical investing in your overall financial plan is key. It needs to be part of the first step you take now and moving forward. You need to be asking yourself some particular questions about the individual decisions but also about the broader goals you have. Some things to consider are:

How Much Profit Do You Want?

While sustainable investments are lucrative, they’re still on par to most non-sustainable funds, if not slightly better. It’s worth it to ask this question to help you be realistic about what you’re investing in right now.

What Is Your Plan With Your Money?

Making a soon-to-be big purchase means you’re thinking short-term and will be looking for something very different than say saving up for your retirement that won’t happen for several decades.

How Much Time Are You Looking To Hold Money For?

Similarly, you’ll be looking at different levels of risk when determining the time frame you have. Keeping money held in one spot for decades is different than trying to invest in something short-term.

How Much Risk Are You Willing To Take?

While the world is turning to invest ethically and all around cleaner energy, making this a sound investing strategy, stock prices will rise and fall regardless. It pays to ask yourself how you would feel about stock prices falling.

What Are Some Good Qualities For Ethical Fund Managers?

More likely than not, the average ethical investor is going to be dealing with a fund manager. Not only will these fund managers have extensive knowledge of investing and markets, but your ideal ethical fund manager is going to help create a portfolio that will satisfy your goals and is reasonable to your financial situation.

Beyond that, there are some key traits to be looking out for in fund managers too.

Great Communication Skills

A fund manager is the communicator between you and your financial goals. They are meant to guide you along the path. As such, communication is crucial. Not only in the frequency of calls, video chats, newsletters, and reports, but also in how they communicate. You’ve got good fund manager if they’re responsive, can articulate clearly, and can explain complex topics in non-financial jargon.

Methodical Decision Making

Ethics is a morality question with no clear right or wrong answer. It’s not the most satisfying element, but it says a lot about the person in the decisions that each person makes with regards to their morality. As such, it pays to have fund managers be as methodical in their decisions as you are as an ethical investor.

Fantastic Track Record

While past performances don’t guarantee future results, they do establish clear expertise and can be translated to said fund manager’s ability to generate consistent returns. There’s more reliability when someone consistently performs on par or exceeds the market’s returns every full market cycle.

Continuous Learner

One of the qualities of an expert in any field is that they keep learning new things. As much as ESG and sustainable investing are creating a positive impact on the world, there are still flaws. There’s still grey areas, as people can leave certain decisions up to various interpretations.

When it comes to ethical investors and the people they work alongside, there is no difference either. So it means something when the person you’re working beside is just as keen and is learning alongside you.

Unshaken Beliefs

Not only should beliefs be consistent, but the conviction in their overall investment philosophy and process should be grounded in confidence and comfort. Flexibility is important for sure, as rigidity can stifle creativity and problem solving, but the core principles that a manager has should be solid.

How To Evaluate Ethical Investment Funds?

There are several qualities to investment funds to be looking out for. You know you have good-quality ethical investment funds when they have qualities like the following:

Consistent Reporting & Engagement

Even if you choose not to put money into actively funded investments, a sign of good ethical investment funds is that they’re still providing you regular reporting and showing you the positive impact your investment is making. This is on top of showing off their efforts in engaging with the companies they represent too.

Diverse Team

It says something when the investment fund itself is diverse and practicing inclusion just as much as the companies they allow in their fund in the first place. It also says something when investment funds don’t do that either.

Long-Term Focused

Even if your sustainable investing is short-term, the investment fund itself ought to be thinking long-term. This means, as a company, prioritizing sustainable growth over making a quick buck from this investment philosophy.

Independent Oversight

If the investment funds you’re looking at have third-party assessments and certifications, this can only add more credibility to ethical claims that investment funds make. It’s a good sign when an investment fund is going out of its way to have its claims checked by outside sources.

What Are The Benefits To Ethically Investing In Companies?

Between the various questions and the hoops one has to go through, it can feel like the amount of information needed to make an ethical portfolio is a bit overwhelming. It can be even more disheartening when you find companies or ethical investment funds you invested in getting wrapped in some greenwashing scandal or aren’t making as much progress as you want them to.

It’s times like that where it’s important to remind yourself about these various benefits of doing this extra legwork. Because it is worth it when you consider these benefits.

Peace Of Mind

To begin, having an ethical portfolio provides some level of comfort that one less person is enabling massive corporations to do more harm to the world. It can also be comforting to see investors pulling money from those same companies and directing them towards better causes. That or forcing companies like Exxon, Chevron, Nestlé, and many others to clean up their acts and do better.

It Encourages A Better Lifestyle

Adopting a more ethical investing strategy can also add some introspection to ones life overall. While it could feel good to divest from oil or other harmful companies, it’s not exactly going to encourage companies to change quickly.

However, the act of doing that yourself could encourage you to be less reliant on them. Divesting from oil companies can encourage you to bike more or travel by train or public transit. Divesting from clothing companies can mean taking up sewing more and repairing clothes.

Getting The Satisfaction Of Company Compliance

It’s great to see regulatory bodies and governments taking action and reeling in big businesses. Whether it’s charging them fines or forcing them to be better players in the free market, these changes only serve as benefits at large as more regulations are being made and enforced.

Seeing this on a larger scale is satisfying in its own way.

And even when governments don’t step in, shareholders, who are their customers too, can set them straight by divesting if they have to.

What Does The Future Of Ethical Investing Hold?

Initially, ethical investing started off as more of a screening investors did for potential companies to invest in. However, it’s since evolved from being just this positive screening.

It moved into specific investing philosophies. It incorporated ESG values where investors looked at non-financial factors. It incorporated facts to accurately determine whether a company is making a positive impact or not. This is in addition to how much that impact is.

And it’s a philosophy that is encouraged so much that it’s captured the attention of the general public, who see this as a viable method for getting into investing and securing a better financial future.

Even though ethical business practices are growing, there are still many barriers. Government regulations and standards need more work. Companies need to be making more rapid changes to be more sustainable. Billionaires need to stop union busting and actually help the employees that are brought on at every level.

Those are difficult things to do and is just the tip of the iceberg.

But one thing is certain: ethical investing and the investing philosophies that it encompass are staples of the investing world and aren’t going anywhere. In fact, they can be the foundation for what the next generation will say as good investing practices.