How to be an ethical investor

Your investments have the power to change your future and the world. Deciding to invest ethically can ensure that your portfolio matches your personal beliefs and acts as a useful filter for a world that is becoming increasingly concerned about issues such as social equality and environmental protection.

Anyone can be an ethical investor. It is simply a matter of identifying and understanding your own moral code, and then seeking out investments which align with it. This may involve divesting from companies which are causing environmental harm or increasing your allocations to companies investing in renewable energies and other ‘green’ projects.

What is ethical investing?

Ethical investing is extremely subjective and may mean different things to different people. It involves factoring your personal values into your investment strategy while also seeking out positive returns. But the nature of these values will obviously vary from person to person.
When seeking out ethical investment opportunities, some investors may prioritise their religious beliefs, their political beliefs, or their general belief in social justice and environmental care. As a result, there are a lot of definitions that fall under the ‘ethical investing’ umbrella. These include:

1. ESG investing

ESG refers to environmental, social and governance criteria. It is an acronym which has been adopted by many companies and investors as a way of telling where a particular company stands on important issues such as climate change. There are now ratings agencies and dedicated broker analyses which focus on the ESG credentials of major listed firms, making it easier to seek out and identify ESG-friendly investments.

2. Shariah-compliant investing

Traditionally rooted in Islamic teachings, Shariah-compliant investing is suitable for Muslims and non-Muslims alike. Investments in gambling, pornography, tobacco, alcohol or weapons manufacturing is banned, while debt-based investments are extremely limited. This makes Shariah-compliant investing suitable for anyone who is keen to avoid the so-called ‘sin stocks’ and stick with well-established stocks in sectors such as healthcare or tourism.

3. Green fund investing

Greenwashing has become a huge issue in the financial world in recent years, as companies scramble to take advantage of the trend for green and ethical investing. However, there are still ways to invest in green funds and companies which are truly having an impact. The renewable energy sector is an obvious first stop, as well as any business focused on the conservation of natural resources. Oil, gas, mining and aviation firms are to be avoided.

4. Political investing

Politically minded investing has become more commonplace in the post-Trump era, with some investors choosing to divest from firms that donate to certain political parties, and invest in those firms which are more closely aligned with their personal politics. For instance, the Demz fund only invests in companies in line with the US Democratic Party beliefs.

5. Socially responsible mutual funds

Socially responsible mutual funds or SRMs are run by managers who research the sector and filter through stocks to ensure they are ethical and compliant. These funds have clearly stated goals and criteria for investment. Many of these ‘walk the walk’ and use a portion of returns to give back to social or environmental initiatives.

Once you are aware which type of ethical investor you are, you can start applying your principles to your investments.

What about the returns?

While virtue may be its own reward, ethical investing can offer financial rewards too, if you choose your portfolio carefully.

A number of green funds have demonstrated healthy returns throughout the Covid-19 pandemic. The risk of climate change has encouraged more investors to consider backing green companies and sectors such as clean energy, which has in turn boosted the value of their stock.

However, when your investment portfolio is driven by your ethics rather than the desire for the highest possible returns, there is always a risk that you are sacrificing profits for principles. Oil and gas companies and mining firms are popular additions to any growth portfolio, but ethical investors would consider these stocks a no-go area.

Being guided by your beliefs means turning down investment opportunities that may otherwise be potentially reliable and lucrative. This can dramatically reduce your investment options and will require additional effort to find the right investment for you.

Ethical investment also involves significant research. This means understanding key touch points for your investment, as well as the company’s partnerships and parent companies. You will also have to be willing and able to review and rebalance your portfolio on a regular basis to reflect any newly green options, or to remove any investments which no longer represent an ethical choice for you.

This can be time-consuming. Instead of monitoring individual stocks and shares for evidence of their ethical position, it may be easier to simply invest into an exchange traded fund (ETF) or mutual fund which specialises in this sector and does all the hard work for you. Choosing that option limits the amount of research you must do to the methodology of the fund, instead of individual shares. However, over time it might be a good idea to do spot checks on some of the companies included in the fund. This bit of due diligence will ensure the fund managers stick to their mandate.