What is ethical investing and why you should care
A large number of ethical investing opportunities have emerged in recent years as investors seek ways to use their money more consciously and responsibly.
Definition of ethical investing
Ethical investing involves avoiding companies that engage in unethical operations, such as tobacco, defence/weapons, alcohol, gambling and adult entertainment. Ethical investments are gaining popularity due to increased social awareness and transparency. This is a something every investor should reflect on, asking themselves, for example, "Do I want to be associated with companies that thrive on gambling and addiction?"
The idea is therefore to focus on investments and socially and environmentally responsible companies by addressing the following points:
From an environmental point of view, what are the company's efforts to limit the impact of its activities on the planet? In the social field, does the company have a positive impact on its employees, suppliers, customers and its wider social circle? In terms of governance, what is the policy in terms of transparency, internal control, employee diversity and non-discrimination, etc?
The principle of ethical investing is therefore to encourage ethical practices by channelling funds to companies that make similar commitments.
How ethical investing works
First, there are SRI funds (Socially Responsible Investment). People invest in an equity fund for which the management company commits to investing in companies based on good environmental and social practices, and governance.
Exclusion funds are another option and are more widespread in Anglo-Saxon countries. For moral or religious reasons, they exclude certain sectors such as weaponry, gambling, tobacco... or even activities considered by their holders as dangerous for the environment: GMOs, nuclear energy...
A third possibility is shareholder engagement or shareholder activism. This consists in investors demanding stronger social responsibility policies from companies, either by calling them directly, or by exercising voting rights in general meetings. It assumes that environmental or social resolutions are on these meetings’ agenda, which is more common in the United States than in Europe.
Target your investment effectively
As ethical investing is increasingly demanded, it is important to be well informed and thus avoid the "green washing" phenomenon which also exists in financial markets. In this case, it may be helpful to speak to a financial advisor or do some in-depth Internet research. Caution is also advised as many funds promise eye-catching yield rates but have a high risk and are not protected by the financial services’ compensation schemes.
Ethical investing and profit
Ethical investing can face a number of challenges in practice. The first is to know whether SRI funds respect their ethical promises in their choice of companies. However, it is not uncommon to find in these companies’ portfolio oil companies, pharmaceutical companies, agrifood giants, some of whose practices may seem suspicious.
On the other hand, investors expect their investments to be profitable. But is it possible to invest in sustainable and virtuous businesses while demanding the best financial and economic performance?
Is it possible to invest in the equity market, in the largest global companies, while waiting for compliance with sustainable development criteria?
In the minds of many traders, socially responsible investing is often associated with lower profitability than conventional products. The reasoning is that it is better not to expect a high level of financial return. Indeed, under these conditions, profitability is not financial but ethical, environmental, societal... In reality, scientific studies on the subject of ethical investments’ profitability have often yielded contradictory results. In the end, nothing seems to indicate that socially responsible funds are less efficient financially than traditional funds.
Ethical investing is a growing financial phenomenon that could last in the long-term. Large listed companies, with increasing public control, can no longer shirk their responsibilities. Companies that have shown leadership in this area could benefit from higher investment ratings. However, from an investor’s point of view, it is preferable to subscribe to an “ethical” fund which can diversify in several areas, while ensuring that selected companies meet the ethical investment’s criteria.
Last Update on 04/06/20