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Ethical Investments: Definition, Principles, Pros and Cons
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In the midst of climate change, everything in the world is softly forced to make the switch to more sustainable practices – including the financial sector. Between green financing, socially responsible investing, and impact investing – it can be difficult to determine the right type of investment to choose.
What is an ethical investment and its main goals?
What are ethical investments?
Money is never an easy task to handle, and with inflation on the rise – people are becoming more interested in investing, in order to prevent their savings or assets from depreciating in value.
Some of the best investments don’t always equate to the best circumstances for the other side of the financial endeavor – such as investments in fossil fuels or other finite resources that create excessive greenhouse gas emissions.
In the past, this may have deterred people from entering the world of investments: but this is exactly where ethical investments step in to change the game for those seeking both a good financial return and no harm done to the environment.
Ethical investments are made through the investors choice. This can be accomplished by presenting a series of different investments to the potential investor in question, and then they can choose their future investments based on the main mission of the company or organization.
For example, if the potential investor values wildlife and the prevention of species from going extinct – a company that strives to protect wildlife or biodiversity may be deemed as a viable ethical investment.
“ However, ethical investments are not constrained to one category – as ethical investments can qualify as any investment that seeks to support industries that aid the creation of positive environmental, social, or economic change. ”
Therefore, examples of ethical investments could include investments that help the development and deployment of renewable energy, assist in providing education for developing countries, or aid in scientific research for new low-carbon technologies.
Some ethical investments are not going to be viewed as ethical to everyone, as what is “ethical” is subject to the eye of the beholder.
What makes ethical investments different from other investments like green financing,socially responsible investing, or impact investing?
What is the difference between ethical investments, and other sustainable investments?
The truth is, there isn’t a big difference between ethical investments, green financing, socially responsible investing, or impact investing – as they all pertain to a similar ideal: the importance of creating positive change while simultaneously reaping financial rewards.
However, the way in which all of these different types of investments accomplish these goals are different.
Socially responsible investing
Socially responsible investing is similar to ethical investments in the way that SRI strives to choose investments that adhere to the company or projects that have the same values as the investors themselves.
Socially responsible investments also require a sifting process to determine which companies are truly implementing the measures necessary to provoke environmental change. This is usually deciphered through which companies have acquired certifications like an ISO 14001 or who has a good ESG score.
Green financing
Green financing is the pursuit of contributing financially to a product that encourages eco-friendly activities: such as the production and selling of eco-friendly products or putting exceptional efforts into reducing carbon emissions.
Impact investing
Impact investing on the other hand solely aims to invest in projects or businesses that are dedicated towards creating environmental change, and doesn’t require the same selection process that socially responsible investing might entail.
In this way, ethical investments may seem more similar to impact investing.
What makes ethical investments different?
The bottom line is that all of these different types of investments and financial activities aim to benefit the environment or society, and aid in the development of positive change.
However, the main difference between ethical investments and other sustainable investments – is that the main goal of ethical investments is to allow the investor themselves to follow their “moral compass” in their investment.
In other words, in ethical investment, it is most important that the investors feels good about the investment choice – whereas with socially responsible investing or impact investing: ESG scores and the project or organization’s positive impact is the main priority.
Why would one pick ethical investments over a different type of sustainable investment?
What are the benefits of ethical investments?
In addition to these benefits, contrary to popular belief – ethical investments are also able to provide similar financial returns as traditional investment funds. In this sense, there is really no reason to not opt for an ethical investment as opposed to a traditional one.
Think of an ethical investment like going to the grocery store. Imagine that you go into the store looking to get a specific item, but it turns out – there’s a sale, and you get to pick out an item for free. You could decide to just pick up the item you intended to and ignore the choice for a free item – but why do that if the option is there?
Ethical investments are like the free item, and traditional investments are like going to the grocery store and picking up what you need and ignoring the choice for an added bonus. Seeing as both ethical investments and traditional investments are likely to yield similar financial returns – it’s more mindful to choose an ethical investment instead, as it can help to improve the environment and society as well as increase the funds in your bank account.
However, it is important to not take this as a guarantee of an ethical investment performing well financially – as no investment is ever 100% surefire.
The best part about an ethical investment, is that it will feel more personal to most investors – and ultimately encourage them to contribute more to something that is likely to be a beneficial cause.
The intrinsic motivation provided to investors through ethical investments is arguably the greatest benefit of this type of sustainable investment: as the investor will feel content when their project or organization of interest does well (not just for financial reasons), investors of ethical investments will be advocating for sustainability, and ultimately encourage other businesses to implement ethical practices as well.
What are the downsides of ethical investments?
Nothing is perfect – meaning as great as ethical investments sounds, they are bound to have some downsides as well. The primary disadvantage of ethical investments is that it takes longer to curate a portfolio for an ethical investment than it does for a traditional one.
Therefore, many interested in ethical investments might be deterred from starting one given the additional time, research and money it might take – especially if they choose to recruit the help of a third party like a robo-advisor or traditional financial advisor.
Those determined to make an ethical investment need to be confident in their values and beliefs, or they won’t be able to adhere to the main premise of an ethical investment in the first place. Also, ethical investments are not for those solely in it for the money – and while no investment is ever guaranteed to bring someone wealth or fortune, those with that mindset shouldn’t seek ethical investments.
Aside from these cons, ethical investments are likely to pique the interest of many – as those who are interested in ethical investments in the first place are often not preoccupied with the initial downsides.
How can you get started with ethical investments?
Similar to socially responsible investing or impact investing – many seek the help of a third party, usually a robo-advisor, in order to build their ethical portfolio. This isn’t necessary, but can prove useful for those who may find the process of starting their own ethical investments to be too daunting.
People opt for robo-advisors as they are often more affordable than real-life advisors, but still offer the same expertise and financial assistance when starting a portfolio for ethical investments. Robo-advisors accomplish this through the use of algorithms that assess an individual's risk tolerance, financial goals, and most important values. The options are then filtered to adhere to your ethical preferences, and allow you to choose without having to do any of the grunt work.
Think of a robo-advisor like going to a restaurant specialized in a cuisine you know nothing about. Imagine the menu given to you has the name of the dishes, but no further information on the ingredients, flavors, or spices used in the dish. In order to decide what you want to order, you’d have to do some research before going to the restaurant.
However, imagine that the menu lists all of the ingredients and flavor profiles on the dish – with a waiter or waitress willing to expand upon the listed descriptions. A robo-advisor for ethical investments is like having a well-written menu at a restaurant – making it easy to choose even if you have no prior knowledge on the cuisine (or potential ethical investment).
However, a robo-advisor can’t do everything – the world hasn’t developed technology to read our minds just yet. Therefore, before recruiting the help of a third party like a robo-advisor, it’s imperative that you first determine what it means to be ethical from your point of view.
For instance, some may view electric cars as more sustainable and ethical due to the fact they don’t use gasoline – which emits harmful fossil fuels and subsequently greenhouses into the air that pollute the atmosphere. On the other hand, someone may see electric cars as a new environmental problem given the need for them to use lithium ion batteries – which can easily end up in the landfill and create excess waste.
Once you’ve decided how involved you want to be in your future ethical investment, then you can begin your search – whether it be with a traditional advisor, robo-advisor, or alone. Some popular types of ethical investments in order to cultivate a sustainable portfolio include the use of individual stocks or mutual funds.
As more companies begin to recognize the importance of sustainability, the number of available projects or organizations with ethical missions are bound to increase – meaning the options for ethical investments will become more plentiful as time goes on.
Whether you opt for ethical investments, green financing, socially responsible investing, or impact investing – you can’t go wrong. All of these types of sustainable investments are often expected to create the same, lucrative financial returns while also positively impacting the environment and society.
As the number of options to choose from for ethical investments continue to grow, we think giving it a try could encourage you financially – and make you feel good about your beneficial, potentially global positive impact.
What about Greenly?
If reading this article on ethical investments has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.
Click here to learn more about Greenly and how we can help you reduce your carbon footprint.
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