08:24 AM, 02 Mar 2024 (AUS EST)   The market is currently closed       

What Is Ethical Investing?

Ethical Investments are also sometimes referred to as Socially Responsible Investments, SRI. Some reports suggest that these types of funds will reach the value of 3 trillion dollars by 2011 in the USA and $15.73 billion in Australia. What are they and how does it affect our lives?

If someone came to your doorstep asking for money to cause a disease, or carry out a terrorist attack we would quickly rebuff them and call the authorities. But what about the more grey area of investing in companies that engage in practices that go against our moral code? Could we be giving tacit approval to their actions and even provide the means for them to prosper by investing in their shares?

What Do You Believe In?

Before we talk about ethical investing we need to analyze what our ethics or belief system principles are. Here are a few questions we could ask ourselves to start:

  • Which is more important to me: the long term sustainability of our environment or the shorter term social aspect of saving of our economy?
  • Am I okay if a company creates toxic fumes or sells addicting products such as tobacco?
  • What is my stance on stem cell research where embryos are used?

While there is no one standard for morals, some traditional values are held by a large population that include respect for honest people, looking after our environment, and not creating, assisting, or even inadvertently causing disease, death, and destruction. How far each person will take this issue is a personal matter.

Funds have been created that will only include investments that are ethically sound. Let’s look at one example of a company that some consider to be unethical.

Monsanto and Ethical Investments

Monsanto is a company that has strong ties to genetically modified foods. Some studies have shown these foods to release harmful chemicals into the food chain supply. Monsanto also sells GM (genetically modified) seeds to farmers. These poor farmers will buy one year’s supply of seed and grow a crop. They will use the seed from the crop to help with next year’s supply. However, in the goal of increasing profits, Monsanto made the seed grown from the crop impotent. The farmer is either forced to buy more seed annually or not grow a crop for the second year. Many farmers are too poor to buy seed every year and so famine increases.

A flurry of lawsuits has been launched against this company. Ethical investors will generally avoid any contact with this company. The list provided here details funds that include Monsanto as an investment. These would not be considered ethical investments.

Two Methods of Ethical Investments: Active and Passive

There are two basic guiding principles when it comes to ethical investing: buying into ethical stocks, and staying away from unethical stocks.

Positive Investment Screening: These refer to finding companies and investment opportunities that actively promote the ideals you believe in. This is taking an active approach. To find a positive ethical investment do the following:

  • Write down a list of core values that you hold dear. Next, actively screen for companies that have those values. Focus on their main business core. Do not be fooled into companies that try to ease their conscience by charitable donations toward worthwhile causes.
  • Use online tools such as this one for Socially Responsible Investing that will detail different ethical funds as to how they uphold such values as climate, pollution, community development, labor relations, alcohol, animal testing, and more. For Australia you can follow this link to read about Australia Ethical Investment and Superannuation funds here.

Negative Investment Screening: The goal of this screening tactic is to come up with a list of stocks we want to exclude for investment choices. Broadly this can be performed by excluding entire industry groups that go against your values. This would be viewed as a more passive approach. Most online stock screeners will allow for this type of industry exclusion.

Getting Help with Your Socially Responsible Investment

This is a three pronged approach when creating a socially responsible environment.

  • First, you can lead you life in a manner that coincides with your values. This may mean limiting your purchase of certain plastics or Styrofoam, carpooling, bicycling, or taking public transit, installing fluorescent lights and so on.
  • Second, you can pick a mutual fund or ETF fund that has a manager with core values similar to your own. By reading their prospectus you will quickly get a feel for the ‘ethicalness’ of their product.
  • Third, you can use screeners, ‘green’ websites, and professionals to direct you toward certain stocks and investment opportunities. In a sense you are your own ethical manager that picks stocks and shares based on your own custom criteria. This allows for the most flexibility to include or exclude certain companies, although the work involved is more than option two.

What Sort of Returns Can I Expect?

When it comes to managed funds, what sort of return expectation is there when picking a socially responsible one? Often, people assume that ethical companies that do not engage in the under-handed practices of their peers cannot out-perform unethical ones. However, other studies suggest that ethical funds have prospered and experienced decent growth, such as in 2002, while traditional funds were contracting in value.

It is unclear though why the funds are experiencing growth. Because our world is becoming more ‘green’ conscious, this has led to increased interest in these funds. Is the growth led by bottom line appreciation in the invested companies, or are the funds rising due to the SRI attraction of late? This is hard to distinguish.

Nonetheless, if ethical investing is something that fits with your core values, it is a responsible way to make money while feeling good about your gains.