Investing ethically: it’s up to youInvesting ethically: it’s up to you

Investors are no longer making decisions solely on a financial basis. Instead, they’re combining financial information with questions about how ethical a company is (or isn’t).

This can make a lot of sense to some investors. After all, investing in something is essentially saying you want more of that thing in the future. So, by investing in things you do want to see and avoiding things you don’t want to see, you can use your money to have some impact on what the future looks like.

Your values

Ethics are personal. There’s no absolute right or wrong answer as to which investments you consider to be ethically acceptable, and which investments are not. Different investors value different things. 

If you want ethics to be part of how you make investment decisions, you should think about which issues matter the most to you. Are you concerned about climate change? Do you prefer a company actively supporting charitable causes? What about workplace health and safety, or workers’ rights in general? 

It might be useful to get a bit of paper and write these down. Organise them like a traffic light—the ‘red’ issues are the issues you don’t want to invest towards at all, while the green issues are things you actively want to invest towards. Everything in the middle is an orange issue, which you can decide on a case-by-case basis. 

Making ethical investment decisions

Now you can start mapping these issues to different investments. For example, someone with climate change as one of their ‘red’ issues might avoid oil companies that aren’t investing in clean technology or that are known for environmental destruction. Someone with gambling as one of their ‘red’ issues may not want to invest in betting businesses or companies that hold property for casinos. 

But this can be easier said than done. For example, some may decide to avoid an oil or mining company when thinking about climate change. But then how do you consider other companies and their environmental impact from emissions or waste production? Or where you’re concerned with human rights and workers’ rights, how do you figure out which organisations are treating their employees well, and which ones aren’t? What’s more, how do you define something like that in the first place?

ESG investing

One approach is to outsource the decision-making by investing in funds that follow an ESG (environmental, social, and governance) strategy. Funds that follow a strategy like this will make investment decisions based on how well companies perform on these criteria—do they treat the environment well? Do they treat their people well? Do they have good processes and fair pay?

The benefit of investing in funds that use ESG principles is that the fund is making the decisions for you. But there are a couple of tradeoffs as well. First of all, your values probably won’t 100% map to the way the fund applies its ESG principles. They might be close, but they won’t be 100%, because values are unique to you.

Second of all, there’s no standard set of rules for what makes a company ‘good’ or ‘bad’ in terms of ESG. So it’s worth researching the fund, to see if they’ve published an ESG strategy. Do they seek out ‘good’ investments, or do they just avoid ‘bad’ ones? How do they define ESG criteria? The closer these definitions are to your own set of values, the better. 

The important thing to remember here is that there’s a broad spectrum of ESG approaches—so if this is important to you, make sure you have a good handle on how the funds you’re investing in apply ESG. And if you like ESG investing, but don’t like the way your fund is applying it, don’t be afraid to shop around! Different funds follow different strategies, so you may be able to find one that better matches your values. 

Invest in companies

If you want 100% control over where your money goes, creating a portfolio solely by investing in companies may be a way to make this happen. To do this, just go through the red, orange, and green light exercise you did earlier, and figure out which companies apply to which colours. Then, you can use that information to drive your investment decisions.

Do some light research

Start by doing your due diligence. You can search online for a potential investment with some key words related to issues you care about. For example, you might search for a beauty company with key words like ‘animal cruelty‘ or ‘fair pay’. Are news stories coming up that you don’t like the look of? Conversely, are there news stories coming up that you really like the look of? Remember, ethical investing isn’t just about avoiding investments that are getting things wrong, it’s also about supporting investments that are getting things right. 

Read up on the company

You can also go deeper if you want. Some companies release specific reports into sustainability and other ethical issues. You can read these if they’re available, and use the information in them to make a decision. Otherwise, you can just look through annual reports, as these give a pretty good idea of what companies care about, and what they invest their money in. 

Of course, the tradeoff here is that it takes more time to research each company, and you also need to make sure you’re diversified. As with everything in ethical investing, it’s up to you and how you want to express your particular values. 

A mixed approach

Finally, there’s a mixed approach, where investors follow one approach with some of their portfolio and other approaches with other components of their portfolio. This could involve investing some money in ESG funds and some money in specific companies. It could even involve investing some money in funds or companies that don’t think about ethics at all! 

This mixed approach can yield a diversified portfolio, which helps reduce the impact of risk. But at the same time, it sends a message about what kinds of companies the investor supports more than others, and how important ethics are to that investor. 

Wrapping up

In the past, most investors just sought out investments that paid them the return they wanted. Now, investors are looking for more than just a return. They’re also looking for investments that reflect their values. 

This is really exciting because it gives you the opportunity to make a difference with your investing. The amount of difference you make, and kind of difference you make, is up to you!