Diversify your portfolio with ethical investing. You can use capital to support crucial causes and back companies positively impacting society. Align investments with your personal beliefs and values with these tips and tricks to help you get started.
Ethical investing is an investment strategy driven by the investor’s moral, religious, honest, and social values. Ethical investors support socially responsible companies working to impact the world positively. Yet, financiers still evaluate the metrics and use intelligent partnerships to boost their portfolios.
What is ethical investing, and what are the different types? How do you use virtuous investments to enhance your portfolio and grow your business? Here is what you need to know.
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There are no financial or performance guarantees when investing based on ethics alone. When you choose to invest ethically, you become selective with your capital and base acquisitions solely on ethical and moral principles. However, this is what makes your portfolio unique.
It’s unlikely you’ll come across another person with the same ethical investing techniques as you. You possess personal morals and values that might not match someone else’s. However, your investment portfolio reflects who you are and what your company does. The same can be said for everyone else.
Each investor has an emotional connection to their capital and its performance. Yet, ethical investing sets the standard for your organization and its future endeavors. It also demonstrates your goals and solidifies your reputation in specific markets. Thus, learning the different approaches and creating a comprehensive strategy is critical.
There are four main types of investments that come up when discussing ethical investing, including:
- Sustainable Investing
- Socially Responsible Investing
- Impact Investing
- Social and Governance (ESG) Investing
These terms are sometimes interchangeable when talking about different ethical investment strategies. However, it’s still important to understand some of each type’s key differences and specificities. A further explanation of those is as follows:
Also referred to as “green investing,” ethical investing is about backing companies that protect and preserve the environment. They typically do this through eco-friendly business practices. Efforts could include techniques such as:
- Using recycled and ethically sourced materials in production
- Maintaining responsible waste management
- Conserving natural resources
Socially responsible investing avoids controversial businesses like tobacco companies or gambling organizations. Mindful investors avoid harmful business practices like paying low wages and maintaining poor work environments.
SRIs might also include dedicating capital to social justice causes. This type of investing — like ethical investing — is personal and up to the investor’s interpretation. It’s also based on what they think is socially responsible and essential. Essentially, this is the practice of investing money in companies and funds that have a tremendously positive social impact.
Impact investments are made to generate specific effects. They often focus on environmental, social, or health-related causes. As an investor, you put your money towards ventures that align with your moral compass. You also make a positive impact while ensuring your capital produces a significant return.
Generally, one of the goals of impact investing is to help reduce the adverse effects of unscrupulous business dealings. Because of that, impact investing is sometimes considered a form of philanthropy.
ESG investing focuses on a company’s environmental, social, and governance practices. It also provides a score in each area. For example, say you want to tailor your investment portfolio to support clean energy. You would check the investment’s ESG score and invest in organizations with the highest marks.
ESG scores can show what companies meet industry standards and which ones are not. You can use the data to compare companies based on their ratings. Investment platforms such as Bloomberg and RepRisk compile ESG data to help investors formulate educated options.
Like anything, there are pros and cons to ethical investing. Therefore, it’s crucial to thoroughly evaluate those before putting your money into any company or cause. Consider this first:
- You feel a sense of accomplishment when investing ethically in companies that ultimately perform well in their markets.
- Your ethical investing could encourage others to do the same thing, leading to measurable change in various industries.
- You reduce the risks within your investment portfolio, ensuring more sustainable business practices in the long term.
- Ethical investing requires time, effort, and research to determine the best partnerships.
- You might have to hire a financial advisor to make ethical decisions and acquisitions.
- Your investments are not guaranteed to generate optimal returns.
- You could inadvertently limit your investment opportunities since some companies won’t meet your ethical standards.
Ask a financial advisor for more information. Find out how you use ethical investing to boost your portfolio and retain your capital gains. Then learn about greenwashing to avoid common pitfalls.
What is greenwashing in ethical investing? It’s defined as a misrepresentation of a product, service, or investment, making it appear to be more sustainable than it is. An example of greenwashing is “farm fresh” printing on grocery store eggs. Often, manufacturers exaggerate “green” claims to sell more products. However, their business strategies might not be as ethical as you think.
Most people will pay more for sustainable goods and services. However, unethical companies know that and take advantage of it. That means their lack of accountability could impact your ethical investing strategy. Thus, it’s always wise to let a financial advisor vet companies and investment opportunities.
You can also refer to ESG funds, which publish impact alerts that allow investors to see their investment’s real-world impact. Similarly, referring to a fund’s prospectus can help. Prospectus research details a particular fund’s performance, objectives, and strategies to reveal exactly where your money goes.
Ethical investing requires you to understand your core values. What you deem to be honorable, sustainable, and worth investing in may be very different when compared to someone else. That means you should take time to evaluate what an ethical investment looks like through the eyes of your organization.
Meanwhile, research what different companies are doing for their industries. Then, determine which causes to support before investing your money accordingly. Also, assess your capital objectives. You should seek a substantial ROI within ten years or less. However, investment partners and business executives can help you determine and sort risks.
Curating an ethical investment portfolio can be a lot of work, though. It takes hours of diligent research to calculate which companies are worth your attention. This is where financial advisors shine. You can also use Robo-advisors to save time and money. However, automated portfolio-building tools lack the intuition and connectivity of live assistance. Plus, robots are objective about socially responsible investing.
Making a measurable impact in your chosen arena using ethical investing may not be easy. However, your investments should always be intentional. Each acquisition should guarantee that the companies you invest in have missions that you support.
You hope that a company does well when you invest capital, yet that’s not always the case. Regardless of market volatility, you must remain aligned with your objectives and maintain your moral compass. Ethical investing means setting an example for various industries, companies, and individuals to follow. Thus, your main goal should never be solely profit.
Remember that your investment in a cause or company can help it grow. That’s because ethical and innovative businesses require capital with a conscience. As their funding increases, your ROI expands in tandem. Meanwhile, your name becomes synonymous with social justice, equity, and other essential movements.
Organizations without significant capital don’t just disappear into thin air. They suffer a slow death as ethical businesses take their place. Put your money where your heart is to impact various arenas positively. Then reap a substantial return from wise investment strategies.
Learning about ethical investing is a process. Yet, there are two types of investments to consider for your sustainable portfolio: individual stocks and mutual funds. Here are some details on both:
Stocks represent a share of ownership in a company. Thus, their value can fluctuate depending on how the business operates at any given time. Investors can sell their shares for profit, and many stocks gain weight within volatile markets.
Individual stocks are easy to trade, often with low costs. However, it may be more stressful to invest in a volatile stock within an ethical industry. Either way, there’s always the potential for significant losses and large gains.
In terms of ethical investing, some companies provide sustainability reports that can give you an idea of the company’s cultural initiatives or environmental impact. You can determine whether it’s a company you’d like to buy stock in with acquisitions based on the morals and values you want your portfolio to reflect.
Mutual funds make it easy to diversify your investment portfolio. They’re essentially pooled investments that contain shares of several different assets, often a range of stocks and bonds.
Mutual fund costs can vary. There’s also a chance they’ll underperform the market. However, investing in mutual funds can be less time-consuming than investing in individual stocks. This is especially true if you use an index fund, like the S&P 500.
Mutual funds invest according to criteria provided by the fund manager. Those criteria could include various ESG factors. Fortunately, you can research different funds to find the best ones for your ethical investing portfolio.
Suppose you want to align your dollars with your values using targeted efforts and diligent research. How do you start ethical investing without a clue about the companies? A financial advisor can help you sort the facts and choose optimal partnerships. However, you must follow these simple steps while they handle the hard stuff:
Figure out what your morals and standards are. Then combine that information with your core beliefs and investment strategies. Only support businesses, products, services, and practices that you deem worthy.
Calculate the optimal return on investment (ROI) for each acquisition. Then ensure each venture performs well with targeted capital and conscientious business practices.
Determine which companies provide the most profitable deals. Remember that ESG scores can help avoid lousy business deals and partnerships with evil organizations.
Begin putting your money where your mind is. Create a diversified investment portfolio with several businesses that align with your objectives. Meanwhile, consider the pros and cons of individual stocks and mutual funds.
Keep track of how each investment performs. Choose quarterly reviews for more detailed feedback. Or hire a financial consultant to help you monitor outcomes and outputs.
Remember to move your investments around based on company objectives and strategy changes. You are not married to the portfolio, and you can restructure the approach at any time.
Ethical investing is an investment strategy driven by the investor’s moral, religious, honest, and social values. It is not based solely on profits or professional clout. Instead, conscientious investments satisfy objectives while supporting sustainable business practices and social equity.
Choosing to invest ethically gives your money more power. It also helps you back causes and projects that align with your standards. Ethical portfolios can protect your organization’s reputation and raise the bar as momentum builds. For more information, talk to a financial advisor.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California; his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
He and his team target investments in US companies that have global market potential, focusing on long-term growth expansion to East Asian markets.
As a Managing Member for his family office fund, J Heart Ventures, Jonathan developed his investing prowess, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.