If you could make an impact on the course of society with your investments, would you?
As the world of business and finance continue to merge with the world of sustainability and global impact, a trend towards ethical investing continues to gain momentum. There’s massive growth in renewable energy and an electric car around every corner. So far, 313 companies have pledged to reach net-zero carbon by 2040. Investors are taking notice and starting to ask an important question:
Should my investments align with my values?
The answer is, as it is to many questions in life: It depends.
The good and bad news is that our world’s sustainability issues aren’t going anywhere soon. So, you have ample time to decide how you want to allocate your money or decide whether ethical investing is worth the effort.
First, you’ll have to understand the ins and outs of ethical investing, determine your priorities and values, and learn how to get started.
What’s the difference between ethical investing, socially responsible investing (SRI), impact investing, and ESG?
Ethical Investing is an investment strategy that relies on choosing investments based on a personal moral code and how companies align with their values. It strives to support industries that are making positive changes in society while also creating a positive financial return.
Socially Responsible Investing (SRI) can be used interchangeably with ethical investing. It strives to create a purposeful, positive impact with financial investments. It can go by similar terms like green investing, sustainable investing, or socially conscious investing.
Impact Investing is a similar strategy, however, the priority is whether the investment creates a positive social or environmental impact. In this sense, the investor puts their values before financial return.
Environmental, Social, and Governance (ESG) criteria is a set of standards that investors use to screen ethical or socially responsible investments. With this in mind, analysts and investors use self-reported data from companies to determine these ESG ratings. Moreover, the data is used to view how they measure against other companies in their industries.
ESG
Environmental – Interaction with our physical environment
Climate Change, Biodiversity, Conservation of Natural Resources, Reducing Carbon Emissions, Solutions to Air and Water Pollution
Social – Impact on society and communities
Health and Safety, Labor Standards, Worker Treatment, Human Rights, Product Liability, Privacy and Data Security
Governance – How the company operates and governs
Diversity and Inclusion, Transparency, Board Independence, Ownership, Ethics, Executive Compensations
How do I start ethical investing?
1. Determine values that matter most to you.
To start, you’ll need to narrow your interests.
Ethical investing can be supporting climate tech like solar power, hydropower, or wind power. At the same time, ethical investing can be boycotting sin stocks like companies that produce alcohol, tobacco, or weapons. You can invest any way you like. The point is, it relies on asking yourself which issues in society matter most to you.
- Do you want to invest in the growing plant-based food industry to reduce greenhouse gas emissions?
- Do you want to remove fossil fuels entirely from your portfolio?
- How about adding investments in women-owned companies or those that support equal access to education?
The options are endless. More importantly, everyone’s definition of what is “ethical” is unique to themselves. Choose your top priorities before moving on to research.
2. Do your company research.
After determining which values are important, it’s time to do your homework.
Looking at a company’s financial statements and overall performance is a given. At the end of the day, we all want to make money, take care of our loved ones, and retire comfortably.
(Tip: Your financial advisor will have all the information you need to help you compare a company’s performance to other investment choices).
In the case of ethical investing, it’s equally important to look into the company’s history and future plans depending on which values are important to you. Factors like green initiatives, community outreach, employee treatment, or previous lawsuits may change whether a company is worth your investment.
3. Be wary of greenwashing.
Unfortunately, all that glitters green is not ethical.
“Greenwashing” has become common as many companies are fully aware of the growing trend towards environmentally friendly investments. This is a strategy that deceptively uses marketing and intentional branding to appear socially or environmentally responsible to the public. In reality, the companies continue to operate on their agenda.
4. Diversification still matters.
Just like a traditional portfolio, it’s important to have a diverse range of investments.
Decide whether you want to change a small portion of your portfolio to ESG investments or if you want to align your entire portfolio with your values. In the latter case, avoid putting all your investments in one industry.
Instead of just investing in renewable energy, for example, balance that with other socially responsible investments. If you’re wary to get started, try allocating a small percentage of your portfolio to your most important value and keep the whole traditionally balanced.
5. Seek the advice of a professional.
In any case, it takes plenty of time, effort, and knowledge to create a green portfolio while still making positive financial returns.
There is no standardized metric for measuring ESG nor is there a “one size fits all” green portfolio. Like a traditional investment strategy, it will take time, patience, and research.
A trusted financial advisor can help you identify which companies are leading the way in climate tech, innovation, and environmental impact. They can also provide insight into market fluctuations, taxes, and other investment goals that are unique to your life. Ethical Investing can be as easy or as difficult as you make it, and it’s definitely easier with expert advice.
Closing Thoughts
As new green technology and initiatives continue to develop, the ESG landscape will continue to change with it. As such, creating a positive global impact on society is a long-term investment on the planet.
While there are challenges in making a positive global impact and creating a green portfolio, the opportunity to invest in a brighter future while still meeting financial goals does exist.
Keep in mind that no matter how you invest, whether for profit or value, your choice is not wrong. If anything, ethical investing raises the question of whether we should all be seeking deeper clarity on our holdings and how they impact the world around us.
To learn more about how your investments align with your values, ask our financial advisors about our Fingerprint Financial Planning™.
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