What if your investments were not just making money for you to produce? But what if they could also contribute to a world well built? Going conscious with one’s investments is no longer a temporary phase for socially responsible investors.
It is a powerful solution that lets investors align their financial portfolio based on their personal values. This post is an introduction to socially responsible investing (otherwise known as sustainable investing) and looks at five different types of strategies, varying from simple exclusionary approaches to more proactive impact-focused methods.
Investing ethically does not require you to become the next Warren Buffett; there is something for everyone. How you can put your money to work that makes a difference — while also furthering your financial goals. Learn about five ethical investment options that create social and environmental impact. Join the movement towards responsible investing and make a difference!
The Ethical Investing Evolution
Brief History
A very basic, simple filter-based form of ethical investing can be traced back to the origins when religious institutions instituted exclusionary screens avoiding “sin stocks” like tobacco and alcohol. This philosophy has developed dramatically in the years that followed.
Modern Expansion
The landscape of ethical investing — or, as it was known then, socially responsible investing — is far more advanced today and a lot more dynamic: a new approach that is data-driven, holistic and forward-looking. Today, investors are seeking not just to shield themselves from bad actors but also to promote the good.
Terminology Clarification
- Ethical Investing (or SRI — Socially Responsible Investing): The broad catch-all term for investing based upon a value set.
- ESG Investing (Environmental, Social, Governance): This is more of a framework that relies on non-financial criteria to decide whether the company is doing well or not.
- Impact Investing: A more targeted and measurable approach to delivering positive outcomes.
Type 1: Negative Screening (Exclusionary Investing)
This form of ethical investing is the original and perhaps most mundane option. This is the practice of omitting companies or even entire sectors from your set of investments according to ethical, moral or religious values.
How it Works
A list of industries an investor or fund manager will not put his money into. Common exclusions include:
- Sin Stocks: This is tobacco, alcohol, gambling, and adult entertainment.
- Highly Controversial Sectors: Arms; Fossil Fuels used for Power Generation and Mining or the Products of such Activities; Machines that use these Fuels; Tobacco Products.
Making a Difference
While negative screening is often considered a passive way to invest, it does send the message that these industries are not wanted. It is one way to take a stand, ensuring that your money does not support businesses that run afoul of your most core beliefs.
Type 2: Positive Screen (impact — or inclusion-based)
Unlike negative screening, which simply excludes companies from an investment universe based on a lack of ethical, social or environmental standards, this approach proactively includes good corporate citizens.
How it Works
An investor/fund manager identifies the companies that excel in sustainability, diversity, fair labour practices or community engagement. One of the keys to this is a “best-in-class” approach, where investors invest in the highest-performing companies (as measured by their environmental and social performance) within a given sector, even if that sector isn’t perfectly “green”.
Making a Difference
It works by directing capital to ethical companies which urgecompliance and emulation from other businesses. It is a proactive way to positively influence only those businesses that are actively trying to be a force for good.
Type 3: Environmental, Social, and Governance (ESG) Investing
It is currently the most commonly used sustainable investing framework. It measures the performance of a company using three unique non-financial criteria:
- Environmental (E): The effect a business has on the natural world (e.g., carbon emissions, waste disposal, use of renewable energy).
- Social (S): How the company treats people and communities in which it operates, such as labour practices, stakeholder management (employees, customers), and human rights.
- G: Governance: executive pay, board diversity, shareholder rights, anti-corruption policies and more.
How it Works
Whether it is by analyzing publicly available data, using third-party ratings like MSCI’s ESG Ratings, or proprietary research, investors elect to make comparisons between a company’s ESG performance and its traditional financial metrics.
Making a Difference
ESG investing is the premise that companies with solid ESG (Environmental, Social and Governance) practices are not only more morally integrous, but they are also likely to be more stable and equipped for long-term sustainability. It nurtures sustainable and responsible business practice, which in turn makes for a stronger global economy.
Type 4: Thematic Investing
Companies that are very attractive to you over a 20-40 year period because they clearly align with some macro trend we can see on the road ahead… And tip of the hat here to Meb Faber, who taught us this meaningfully simple concept.
How it Works
There, investors pinpoint global “megatrends” and compile a company portfolio to make the most of those trends. Ethical themes often include:
- Clean Energy: Not nuclear, but companies in the solar, wind and geothermal power space.
- Sustainable Food & Water: Vertical farming, water purification, plant-based foods
- Social Inclusion: Microfinance companies, Affordable Educational Services and healthcare, etc.
Making a Difference
Thematic investing enables you to invest in global solutions from around the world. Investing in these spaces also helps expedite technologies and solutions that solve problems our society and environment desperately need help with fixing.
Type 5: Impact Investing
This is the most explicit or hands-on type of ethical investing. This means investing in companies or funds with the aim of not just securing a financial return but also a clear and quantifiable social or environmental impact.
How it Works
That could be, for example, by investing in a particular project or in the shares of private companies. Examples include:
- Microfinance institutions loan money to small businesses in developing villages.
- A stock of a construction company which builds cheap homes.
- Investing money in a rural renewable energy project.
Making a Difference
What it does mean is that impact investing is more than the distinction of avoiding the bad and supporting the good — but its about active change. It is a mechanism to deploy capital in order to solve an issue, followed by measuring the physical deliverable results with both a positive financial and social impact.
Conclusion: A new age of investing with a purpose
There are so many different strategies and approaches for ethical investing, from impact investing through to more traditional ESG screeners — that even the most conservative investors right through to the super radical vegan commie investor could find an approach that would suit their worldview. These are five ethical investment strategies:
- Negative Screening (avoiding undesirable companies)
- Positive Screening (including responsible companies)
- ESG Investing (ESG refers to environmental, social and governance)
- Thematic Investing (which centres on the forces shaping the future)
- Impact Investing (creating direct change)
Not only is investing with a conscience not a passing phase, but it is also a way to invest in shaping the future we want for our world responsibly.
Call to Action
What kind of ethical investment speaks to you? Start your research today! Check out our ESG fund guide and start growing your wealth in line with your fully realised purpose today!
Frequently Asked Questions
1. Does ESG investing lower returns?
This is a common myth. Indeed, numerous studies show that ethical investments are as good or better than their non-ethical counterparts
2. Is it possible to start ethical investing even if you are a beginner?
Absolutely! You can start with the funds and resources specially designed for beginners.
3. Where are ethical investment options available?
Plenty of banks deliver moral investment funds, and you will discover many online programmes that cater to sustainable investing.
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