ETHICAL INVESTING: Definition, Types, Pros, and Cons

Ethical-Investing

Code of ethics of so many companies these days are just mere formality—a deceptive act to lure more investors to their themselves. There have been cases of companies running their operations outside their mission statement and code of ethics. As an individual investor or organisation, investing in such companies would mean that you’re involved in an unethical investment, and trust me, it gets worse. I’m sure you don’t want that, which is why, as an investor, you should carry out a thorough investigation on every proposing investment, hence, ethical investing.

This post will discuss ethical investing and companies that practice ethical investing, both of which are important topics for you to be aware of. Kindly indulge for your enlightement.

What is Ethical Investing?

Ethical investing is an investment strategy in which the investor’s ethical values ​​(moral, religious, and social) are the main objective, along with good returns. Many investors want companies to invest in ways that are good for society because there are more deals that look fishy or illegal. It would mean treating your employees with respect, making sure your products and services are healthy, and not doing anything unethical in your business.

What are the Ethical Concepts?

Each of the five moral concepts—autonomy, justice, beneficence, nonmaleficence, and fidelity—represents a self-contained and unquestionable truth in its own right. Exploring the conundrum in relation to these guiding concepts may help one arrive at a deeper understanding of the competing interests at play.

How Ethical is Ethical Investing?

Ethical investment gives you the opportunity to put your money into businesses that are less likely to suffer negative consequences, such as damage to their reputation or legal action resulting from unethical business activities. Exchange-traded funds (ETFs) with an ethical focus do exhaustive research guided by a set of guidelines in order to acquire ownership in the most ethical and environmentally responsible businesses.

What are Types of Investing?

You can invest in the following ways:

  • Growth investments.
  • Shares.
  • Property.
  • Defensive investments.
  • Cash.
  • Fixed interest

Can You Make Money With Ethical Investing?

Even though the success of any investment can never be guaranteed, it has been demonstrated that the performance of ethical investments is comparable to the performance of traditional investments; in fact, some study suggests that the performance of ethical investments may be superior.

Who Will Invest Ethically?

Ethical investing is for investors who want to invest their money in charities. For example, if an investor thinks tobacco is terrible, he would avoid tobacco-producing companies or invest in the tobacco-producing companies themselves.

Types of Ethical Investing

#1. Socially responsible investment funds (SRI Funds)

SRI funds avoid investing in controversial areas such as gambling, firearms, tobacco, alcohol, and oil. Here, greater importance is attached to the moral value of the investor over financial returns.

#2. Environment, Social Issues and Governance Fund (ESG Fund)

Unlike SRI, ESG funds consider how environmental, social, and governance risks and opportunities can impact a company’s performance. You can invest sustainably and achieve the same returns as with a standardized approach.

#3. Impact funds

Impact funds also value the fund’s performance. Therefore, they aggressively try to bring about ethical changes with products and services. Impact funds are suitable for investors who are socially responsible but also want good returns.

#4. Faith-based funds

Faith-based funds only invest in stocks that follow religious values ​​and strictly exclude investments that do not fit into this category.

What is the Difference Between ESG and Ethical Investing?

ESG investing, unlike ethical investing, invests in firms with strong environmental, social, and governance scores independent of their track record.

Ethical Investing Companies

#1. OpenInvest

Minimum investment amount: $ 100

OpenInvest is a non-profit group that wants to make financial services easier to understand and make socially responsible investing available to everyone.

When you invest with OpenInvest, you have access to a complete, diversified portfolio that you can change to fit your values. This investment company supports individual and joint accounts, as well as traditional IRAs, ROTHs, and SEPs, not to mention tax optimization at the individual share level, for greater tax savings.

How does it work? With this platform, you open a brokerage account, fund the account, and let OpenInvest do the rest. They can explain what is most important to you (i.e., climate change, social equality) so that your investments are directly aligned.

OpenInvest will maximize your impact measured through its online dashboard, and you can join movements, participate and use the power of investors to grow your wealth directly with the market. This method also helps reduce unnecessary fees and taxes.

#2. EarthFolio

Minimum investment amount: $ 25,000, 0.5% annual administration fee

Socially Responsible Mission EarthFolio is a hassle-free automated investment service based on the idea that “Investing is more than a transaction; It is a personal commitment to the future. “EarthFolio invests only in funds and ETFs with strong ESG or environmental, social, and governance practices. This allows you to get out of the world a little better through intelligent, affordable, and time-efficient investments.

How does it work? Answer 10 questions about your risk tolerance and goals. Then a folder is recommended. It’s that simple you then have a fully diversified portfolio that is automatically realigned and optimized for your specific goals.

Earthfolio allows you to open an individual or joint account, a trust account, an IRA or Roth rollover, a 401 (k) or 403 (b) rollover, or a SEP.

#3. Ellevest

Minimum investment amount: No minimum balance

Socially responsible mission: Ellevest was developed by women for women and offers the only investment algorithm that considers the unique realities of women’s lives, including salary differences and longer life expectancies. While Ellevest values ​​fair investment for women, the organization works with all adult American citizens to help them achieve their financial goals through smart investment.

How does it work? Ellevest builds an investment portfolio with a diverse mix of stocks, bonds, and alternative funds to reduce the overall risk in your portfolio. It also recommends how much you should save and help manage a 401 (k) or roll over a traditional IRA, Roth, or SEP. Impact Portfolio enables you to invest in women in leadership, sustainable practices, and community development.

#4. SVX

Minimum investment amount: Varies by occasion

SVX, based at Socially Responsible Mission Canada, provides critical support to shortlisted companies and funds by connecting opportunities with investors who may also seek financial returns. Offers a curated selection of campaigns in the cleantech, social inclusion, health and wellness industries, and more. All products on the platform are Canadian securities for the private market.

How does it work? Investors can search for active opportunities through the platform. Once SVX has finished the accreditation process and is interested in an issuer, it will look at your investment to make sure it meets your goals. It will keep your money safe and secure, and once the campaign is over, you will receive documentation of your investment if it is successful. You can manage your investments, make transactions, and look at the issuer’s financial history and traction on the platform.

#4. Miraculous Capital

Minimum investment amount: Investments are not currently accepted

Socially responsible mission Founded in 2013, this award-winning investment platform helps people invest in solar projects in the US.

How does it work? Wunder has a national network of large solar partners and actively manages the acquisition of commercial solar opportunities, from underwriting to contracting and building each project. From there, the investment platform manages ongoing relationships with solar customers and sends profits to investors. The trusted team of Department of Energy researchers and industry leaders determines which projects to pursue, so your investment is diverse and well-regarded.

How to Invest Ethically

It is important to investigate the investment’s performance in the past, in the present, and in the future, in addition to conducting research on investments on the basis of ethical principles.  The analysis of a company’s history and finances is necessary in order to determine whether or not the investment is a good idea and whether or not it has the potential to yield big returns. Confirming the company’s dedication to ethical business practices is another crucial step to take.

Even while the ideals and views of an investor may be reflected in the mission statement of a firm, the company’s operations may run counter to those values and beliefs. Consider Enron Corp., which emphasized the importance of integrity and ethics in the workplace by publishing and disseminating a code of ethics paper that was 64 pages long to all of its employees. Yet, report has it that they did not only violate those ethics, but violated also a host of laws by manipulating the authorities for such a lengthy period of time using fictitious holdings and off-the-books accounting.

Advantages and Disadvantages of Ethical Investment

As with any decision, there are pros and cons to consider. Ethical investing may not be the right option for everyone. Still, it can be a more satisfying strategy for those who want their portfolios to reflect their social and moral beliefs better.

Pros
  • Comfort Factor: As long as the companies you invest in to share your values, you feel like you’re helping change the world for the better. When companies perform well, you have the added advantage of benefiting financially from their values.
  • Driving change: Since investors support socially responsible companies and projects, other companies will try to improve their ethical behavior to raise funds. This can only be good for the environment and other important social causes.
  • Future Profit Potential: Socially responsible companies will likely make better profits as consumer behavior shifts toward more ethical shopping. According to Nielsen statistics, almost three-quarters of millennials would pay a premium for environmental goods and services.
  • Social management can lead to better profits through a more engaged workforce: The ethics and sense of social responsibility that make us feel good about investing in SRI companies can mean a more engaged workforce. This, in turn, can lead to higher employee performance, which translates to higher profits for the company.
Cons
  • The Definition of Ethical: You need to decide what you think is ethical or responsible and invest in companies that meet these guidelines. However, it can be difficult to find an exact match. For example, you may not want to be exposed to an SRI fund that includes companies involved in tobacco manufacturing, but the fund may have a 10% tolerance when it comes to such activities.
  • Time and Research: Ethical investing is not a passive strategy; you should research potential investments to make sure they match your values. When every investment in your portfolio has to meet certain criteria, it can get quite complex.
  • Higher fees: Due to additional research and filters associated with SRI, fees can often be higher. Higher fees can affect the performance of your portfolio and therefore underperform more traditional investments
  • Often not an optimal strategy: Investing ethically is unlikely to yield optimal returns. Therefore, the investor can sacrifice financial gain for an ethical approach.

What are the Ethical Perspectives?

Deontology, utilitarianism, rights, and virtues are the four basic categories of ethical theory. While it comes to ethics, the deontological school of thought holds that people should follow their obligations and duties when making decisions.

Conclusion

Investors choose ethical investments when they want to make a difference in society. Your main objective when investing is to comply with your moral, social, and religious values, while the returns are secondary.

While ethical investing is good, it is an expensive strategy, requiring extensive research to find an investment that meets the investor’s primary objective. The boycott of companies will not affect them either, as a price cut will not attract unethical investors to buy the shares at a lower price.

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