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What is ethical investing?

There are so many different ways to invest your money on the market these days. Financial products are continuously being developed to answer a need. One of the current hot topics in investing is the idea of investing ethically.

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What is ethical investing?
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There are so many different ways to invest your money on the market these days. Financial products are continuously being developed to answer a need. One of the current hot topics in investing is the idea of investing ethically.

Here, we look at ethical investing so you can ascertain if it is suitable for you and your needs.

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What does ethical investment mean?

Ethical investing is a method of choosing particular investments that meet a set of rules based on ethical or moral standpoints. A good example would be investors who never buy tobacco companies or firms whose primary business is gambling. Another would be a firm that actively minimises its carbon footprint. To determine what investments are ethical, looking at a company’s corporate governance policies can be helpful. Such an investigation helps to ascertain a firm’s approach to sustainable and responsible practices. 

Currently, investors increasingly prefer companies that have a greener approach to their business. Investors want to invest in companies that have an environmentally friendly way of doing business. Investing like this shows that being sensitive to climate change is not just wanted by governments around the world. The rise of ethical investing demonstrates that investors prefer companies which adopt practices that minimise carbon emissions.

Why is ethical investing important?

There are several reasons that the rise of ethical investing is an important notion.

Firstly, it gives investors the power to make their influence known. Ethical investing is undoubtedly on the rise and of increasing importance to investors. As a result, it makes companies more inclined to run their businesses with much improved corporate governance. The influence that ethical investing can have on businesses and the wider world as a whole is subsequently vastly meaningful. Wider society should benefit when investors back firms with more socially responsible procedures—thus demonstrating the importance of ethical investing.

Secondly, ethical investing has arguably seen more favourable returns in recent years. These returns are in comparison to stocks and funds that have been chosen in a more traditional way. The reason being is that stocks and companies with an excellent corporate governance framework are far better placed to grow. Their productivity is that much better - plus they are that much less likely to go into administration. However, that being said, simply choosing a company to invest in because of their ethics is no guarantee of performance.

What are the steps to invest ethically?

Given that investing ethically can be both better for society and investors themselves, what are the steps to invest in this way? There are several options available to you if you decide to invest ethically. They are:

ESG funds

There are funds available that have an ethical strategy. As an ethical investor, you can therefore choose such a fund that invests in a way that focuses on the ethics that mean the most to you. For example, some funds will target investing in sustainably focussed firms. Others will hone in on stocks that promote social betterment. As ever, you need to pick a fund that also suits you and your needs - as well as that appeals to the most crucial ethical idea to you. Investing in a fund in this way can also be known as passive investing.

Stock picking

It is possible to invest ethically by picking stocks that you consider to be ethical. You can do so if you have set yourself up on a trading platform. There, you can manage your portfolio of investments. Consequently, you will be actively investing to create your own ESG type funds. Your active investment strategy will be selecting investments that hit your own moral or ethical criteria. Stock picking in this way can take a lot of work, but it also provides you with the ultimate control over what and where you place your money - and why.

Financial instrument providers

It may not be immediately apparent, but you can also choose a financial instrument provider based on their ethical approach to business. In practice, this means picking between a bank like NatWest or Barclays purely on how you rate their ethics and societal behaviour. 

How you rate them is down to you. You may put more emphasis on a company’s ability to lower its carbon emissions. Or, you may prefer a firm that runs more charity schemes to help those less well off around the world. Either way, again, ensure that whatever financial product you do choose is a product which works for you and your needs. Be it a bond, ISA, savings account or any other investment type.

Ethical investing for you

It is always imperative that you consider any investment in terms of how suitable it is to your needs. Just because you want to invest ethically, does not mean that every ethical investment meets your requirements. In fact, it is simply one more criterion that a potential investment has to meet on your checklist. 

Finally, ethical investing is always going to be somewhat subjective. Each investor’s ethical and moral beliefs will be different. As a result, what you may deem as an ethical investment may be very different from how another investor rates your final investment decision.

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