Investing is all about making your money work for you so you can grow your contributions quickly and maximize your return. But money talks. And any time you use your money to purchase a product or invest in a company, you’re essentially supporting that organization. Therefore, there are certainly some ethical considerations when it comes to your investing choices. After all, when you purchase stocks, you back a company.
So, do you go for maximum returns or focus on ethical and sustainable investing? What if you could do both? Let’s look at five tips to help you invest without compromising your values.
What is Ethical Investing?
Ethical investing, sometimes called socially responsible investing (SRI), balances the financial returns of investing with ethical, social, and environmental beliefs and goals. This means your morals or ethics primarily direct your investment choices. However, it’s essential to understand that selecting investments based on ethics does not guarantee performance.
Typically, ethical investors avoid companies that sell or deal with alcohol, firearms, nicotine, gambling, and environmentally harmful products.
For example, an ethical investor may opt out of investing in oil companies and in organizations focusing on cleaner energy sources, such as solar energy companies. Investors may do this even if the solar company’s stock has historically performed slightly worse than major oil companies. The thought here is that a slight dip in returns is worth supporting what you believe in.
Ethical investors are sometimes known for using an “ESG review” in their investing approach. Investors review a company’s corporate behavior in regard to its ESG (environmental, social, and governance) impact. These are just as carefully reviewed and examined as financial statements.
Why Is Ethical and Sustainable Investing Important?
When individuals choose to invest ethically, they can feel proud that they’re supporting organizations whose values they can stand behind. Even more importantly, ethical investing has the power to change greedy corporations.
Everything a publicly traded company does is to increase its stock price and benefit its shareholders. Ethical investing gives investors the power to help “reward” and “punish” companies for their behavior.
Companies often make horrible decisions in the pursuit of profit, such as knowingly selling cancerous baby powder for years or causing one of California’s deadliest wildfires that killed 85 people due to not maintaining and replacing equipment.
The hope is that the power of ethical investing will make companies reconsider decisions like the above because they’ll now know that it has the potential to cause investors to pull out and stock prices will plummet.
5 Tips for Ethical Investing
Here are five practical steps you can take to start becoming an ethical investor today:
1. Determine How Involved You’ll Be
There are essentially two ways you can approach your ethical investing strategy:
- You can hire someone to manage your investment portfolio for you and direct them to take an ESG approach. This approach is more manageable as you don’t have to do the work, but you’ll have to pay a management fee.
- You can manage your portfolio yourself and decide which companies to invest in. This will take more time and effort but will allow you tighter control over which companies you support and add to your portfolio.
2. Research Stocks and Companies
Regardless of whether you take the self-directed or assisted investment route, you’ll want to do research into companies. You can always tell your investment advisor which organizations to avoid or which to buy into.
The research will take time as you have to dive into each organization’s corporate values and beliefs while also considering their finances. Additionally, you’ll want to research how corporations appear in the news. For example, a company may say it’s committed to its employees, but then articles will appear online showing that they exploit cheap, unregulated labor overseas.
3. Follow Ethical Influencing Experts
You probably don’t have the time to research all the companies you’re interested in in-depth. One easy solution is to find and follow ethical influencing experts you trust. These experts will do all the work for you and report on the results. So, instead of spending hours researching, you can just listen to their quick recap.
4. Watch Out for Greenwashing
If sustainable environmental practices are important to you, watch out for greenwashing. Greenwashing is known as a deceptive tactic used by companies to trick consumers and the public into thinking they’re doing more for the environment than they really are.
An example of greenwashing is when Starbucks released a “strawless lid ” in 2018, stating that the decision was made for the environment. In reality, the new lid had more plastic than the previous straw and lid combination.
Always investigate a company’s sustainability promises to ensure that they are actually delivering on those promises.
5. Compare Your Returns
Lastly, you’ll need to ensure your portfolio still performs at your expectations. Generally speaking, the average stock market return since 1957 is around 10%, so that should be the goal of your portfolio.
If you’re not getting these returns, this doesn’t mean you have to abandon your approach. Instead, you may have to switch your investment strategy (i.e., more or less risk) and research new companies.
Remember, while supporting ethical and sustainable businesses is important, it shouldn’t come at the cost of your returns. You really can have it all—a thriving investment portfolio that’s ethical. Just like you would optimize a regular portfolio, your ethical portfolio requires review and tweaking occasionally.
Ethical Investing is the New Way Forward
Overall, ethical investing is growing in popularity as more people want to entice corporations to operate morally and responsibly. Experts predict that the ESG investing market will increase by 18.8% between 2004 and 2030.
Where you choose to put your money has an impact on the world. You can use the power of ethical investing to support businesses that operate morally and make a positive difference.
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