Ethical investing, or socially responsible investing, means to put your money where you expect it to have both a positive financial and social or environmental impact.
You can do this by directly buying shares in companies that have ethical practices, or by purchases mutual funds or ETFs of socially responsible companies. In recent years, the demand for ethical investments has grown significantly, which means this once hard to find option is now available to most investors that make it a priority.
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Having an “ethical portfolio” is a noble goal, but many see it as impractical because doing so does mean less choice and frequently lower returns when it comes to investing. However, you don’t have to go all-in — why not add one or two socially responsible investments to your financial assets and go from there? After all, you can do good for the world and still enjoy financial security!
What exactly is an ethical investment?
An ethical investment is exactly what it sounds like: an investment in a company that conducts business ethically.
We would hope all businesses are operating ethically, but the fact of the matter is many don’t. Most of the major brands you know and love make their profits by underpaying third world laborers and wreaking havoc on the environment, or at least outsourcing manufacturing to companies that do. Others fail to adhere to government rules and regulations or deceive investors. Some simply produce poor products that do little more than clutter up landfills.
An ethical or socially responsible company can improve your portfolio while doing good for the world. If you’re interested in investing in ethical businesses, you might want to consider the following when evaluating investments:
- How does the company treat its employees?
- Does the company work with ethical suppliers and manufacturers who provide fair wages and good working conditions?
- Does the company follow government rules and regulations in the country it operates?
- Does the company give back to local and/or global communities?
- What does the company do to reduce its environmental impact?
- Does the business provide a product or service that genuinely improves people’s lives?
- Does the business provide a product or service that reduces or eliminates environmental waste?
In other words, does the company provide genuine, tangible, non-destructive value to someone other than the owners?
Good ethics are good
What’s the point of seeking out ethical investments? Because the more money you as an investor pour into socially responsible businesses, the more they can grow — and the less money there is leftover for not-so-responsible businesses.
Consumers and investors vote with their dollars. By purchasing shares and products of ethical companies, we are communicating that we value these products and services, and are often willing to pay a premium in order to have them. Since businesses need customers in order to operate and thrive, they will shift their offerings to wherever the money is.
The downsides of ethical investing
The hardest part about ethical investing is finding ethical companies or funds to invest in. Then, once you do, it’s paying a premium for their socially responsible ways.
Because socially responsible businesses are being socially responsible by not doing things like underpaying workers or carelessly disposing of waste, they can have higher operating expenses. These increased costs are often passed on to customers, which is why green or organic products often cost more at the store. Likewise, these increased costs can also cut into shareholder profits, which is why the return on these investments might not be as great as less ethical businesses in the same space.
It’s not uncommon for ethical mutual funds or ETFs to boast higher fees than traditional funds. Because higher fees on any investment can drastically reduce returns, this can make socially responsible investing less attractive based purely on financial considerations. You have to glean more value from supporting a moral business than earning a higher return from an immoral one, because often — but not always — that will be the trade-off.
The unfortunate reality is that companies that utilize child labor or don’t care about the environment are able to drastically cut costs, and therefore increase profits, which gets passed on to shareholders. However, your life is about more than money and your financial plan should be too (yes, really), so if you feel passionate about protecting human rights and the environment, make space in your portfolio for socially responsible investments.
How do I find socially responsible investments?
It is getting progressively easier to find ethical funds to invest in. Thanks to demand, both selection and prices are improving. Most major ETF providers like Vanguard and iShares offer social index funds. Some financial advisors now specialize in the area of ethical investing, or at the very least, have some funds to suggest to their clients.
For investors looking to purchase common stock in a socially responsible company, there’s considerably more legwork. However, I would suspect that if ethical and green living is already a priority for you, you probably have a few favorite brands that you’ll be able to find on the stock market.
How much should I focus on ethical investing in my own portfolio?
Where your ethical asset allocation falls is totally up to you. If you haven’t looked into socially responsible investing before, setting a soft goal of dedicating 10% of your portfolio to ethical investments might be a good place to start. As you become more familiar with what’s out there, you can slowly increase this portfolio allocation by adding to these investments, and replacing your existing investments with more socially responsible ones until your portfolio reflects your values.
Ethical investing is good business, even if it doesn’t always show up on your financial statement. Some returns are measurable in different — but no less important — ways.