Until relatively recently, ethical investing had been heard of by relatively few investors. But as the world’s population has become more aware of the problems of diminishing resources, environmental damage, global warming, and health related issues, a greater proportion has become more conscious of what drives these issues.
It’s only natural that investment decisions for some people might be based upon lifestyle choices, in the same way as the choice of shop might be dictated by the wish to only purchase organic foods. However, this style of investing – also known as socially responsible investing – is not only gaining in following from socially conscious investors for ethical reasons, but also is being increasingly considered by the wider investment community for the potential gains that it offers.
What concerns an ethical investor?
In a nutshell, ethical investors would shy away from areas of social concern. We’ve already mentioned above themes such as environmental and health, but of more specific concern would be companies that produce alcohol and tobacco, perhaps mining companies, others that are involved in gambling, pornography, armaments, and so forth.
But ethical investors might not just avoid those companies and businesses that are involved in fields that are considered to be socially irresponsible, but also seek out companies that are proactive in combating such practices.
Companies that research and produce renewable energy sources, or work toward sustainable farming and forestry projects, or mining companies that actively seek to return land to original use, social and green house builders are all types of company that ethical investors would find attractive as investments.
Ethical Investments opportunities are growing
To indicate what a growing investment market ethical investing is, consider the 2010 Trends Report that showed the number of ethical mutual funds had increased by 45% between 2007 and 2010. On top of this, the number of Exchange Traded Funds that concentrate on ethical investments grew by 76% over the same period. During this time, The US SIF reported that ethical investment assets grew by 13%, whilst professionally managed assets grew by only 1% overall. As social trends continue to more ethically minded habits, this pattern is set to continue also.
Increasingly, government funded schemes – such as state pension funds, some of the largest in the world – are being pressured into becoming ‘green investors’. Another boost to the demand for stocks in ethically minded companies.
Is Ethical Investing for you?
Consider how your attitudes to life have changed as information about environmental and health issues have become more readily available. Do you use energy saving light bulbs? Have you, or someone you know stopped smoking? Do you drink alcohol, or have you cut down or stopped altogether? What about the food that you buy? Are there types of food that you no longer eat? Are there shops that you refuse to enter, perhaps because of the use of cheap labor to make the goods they sell?
Answers to this type of question will give you clues to how ethical you may wish to be in your investing, whether for the short term or the long term.
A broader approach
Of course, as the world moves toward a more ethical and sustainable environment so, too, are existing companies. On this basis, many ethical investors take the view of investing in the most sustainable companies, thus not limiting their scope of investment choice. Criteria that might be included to sort these companies out from the wider spectrum includes corporate and community vision, use of renewable resources, climate change policies and strategy, diversity of staff, and shareholder participation. Fortunately, the arduous work of separating the wheat from the chaff has already been done for you!
Since 1999, Dow Jones has run indices of the top sustainable companies across the world. These are indices that are based on the most ethical companies in each market sector, taking into account all of the above criteria and more. This means that you can invest more ethically by selecting the companies within these indices.
You can take a domestic approach or a more international view by selecting stocks from the relevant index, knowing that your stock selection isn’t limited by the (perhaps) more strict selection criteria of ethical investment purists.
Ethical Investing; advantages and accessibility
Whether you take a negative screening approach – divesting your portfolio of the ‘sin stocks’ – or positive investment principles – actively seeking to invest in socially responsible stocks – there is plentiful opportunity in the financial markets to fit your investment profile with that of your lifestyle and social thinking.
If you do decide to be more ethical in your approach to your investments, you’ll be joining a growing number of investors who invest for their social views rather than the sole purpose of speculation or profit.
You might also consider the impact that changing laws are having on ethical companies. Laws that promote green fuels, for instance, will help companies that operate in renewable energy sources and potentially harm those companies that produce coal or oil.
In this world of corporate greed and environmental damage, there is no need to feel unable to invest because of your more socially conscientious thinking. Increasingly there are companies that operate in ways that fit with a greener, and/ or a more ethical, attitude. Some of these companies offer great growth potential, and for those that don’t have the time to conduct their own research there are increasing number of mutual funds available to suit an ethical investing outlook.