Ethical investments can be just as performant, if not more, than their conventional counterparts. Find out more about ethical investments and how you can add them to your portfolio
Investors are no longer interested solely in financial gain. Many investors are now equally as concerned with how their investments impact the planet, society, and our futures, wanting to invest in companies or products that aim to better the world. Over the last couple of years, there has been a sharp increase in ethical investing initiatives. Last year alone, ESG funds accounted for 10% of global fund assets.
Continue reading to better understand how ethical and ESG investing can fit into your own portfolio.
When it comes to ethical investing, how and where you invest your money is entirely dependent on your own personal values and ethics. For example, if you have certain religious values, you can search for faith-based funds where you’re able to invest in assets that align with the principles of your faith.
Sustainable investing, by contrast, is governed by a broad set of criteria that designates an investment or portfolio as sustainable. Often, sustainable investments rely on specific Environmental, Social, and Governance (ESG) criteria to evaluate companies to invest in.
As an investor, you might be discouraged by the additional criteria to consider when choosing ethical investment funds. Not only that, but a study by the Morgan Stanley Institute for Sustainable Investing shows that while interest in sustainable investing remains high, up to 70% of investors believe this type of investing comes with a financial trade-off. However, sustainably-managed assets in the US increased from $236 billion in 2020 to $357 billion as of December 2021. This 51% growth rate suggests that ESG funds can be just as profitable as conventional ones.
Ethical investing is a broad term that covers a few different types of investing. In all these types of investing, the investor is also concerned with social, environmental, and ethical aspects beyond purely financial considerations. Let’s take a look at four main types of ethical investing.
As mentioned earlier, an ESG investing strategy comes with certain criteria that are often represented in a rating out of 100. The score is based on multiple factors, such as:
ESG investing is quickly becoming the norm in certain sectors, namely real estate. According to a survey conducted by CBRE, over 75% of commercial real estate investors have adopted or are considering adopting ESG criteria.
While ESG investing focuses on different aspects of a company’s value system, the idea with SRI is that the type of business the company is involved in is considered socially responsible. Companies that deal in gambling, tobacco, alcohol, or fossil fuels, for example, would be excluded from SRI portfolios due to the nature of their products.
SRI doesn’t have a specific set of criteria like ESG, but rather it’s guided by an investor’s personal set of beliefs. That being said, it’s not uncommon for investors to use ESG guidelines when considering what would be a socially responsible investment.
Also referred to as “sustainable investing,” green investing can be an element of ESG investing and SRI, but it’s a more specific way to decide which assets to take on. Essentially, investors who are interested in green investing will hold the environmental impact a company has in higher regard than other aspects, like their social impact.
While green investing does imply investing in companies that don’t have a negative environmental impact, it’s more targeted at funding companies that have a positive impact. For example, green investors might prefer to take on funds from companies that work with renewable energy sources, making water more accessible, conservation projects, and anything else that might be considered environmentally conscious.
Impact investing follows a similar trend to the other types of ethical investing. It focuses on investing in businesses that have a positive impact. While that impact may be related to the environment or sustainability, it’s not a requirement. Impact investing can also focus on other industries, like education, healthcare, or funding non-profits.
What’s important to take note of with impact investing, along with other types of ethical investing, is that alongside financial reports that explain the earnings on your investment, companies are also meant to deliver reports on targets or progress towards their intended impact. In other words, as an impact investor, you will track how your investment is performing financially and how your investment has been used to reach a company’s social or environmental objectives.
Aside from considering more ethical and sustainable investments, another common trend among investors is shifting from active to passive investments. However, with ethical investing, passive investing becomes more of a challenge due to the hands-on nature of selecting companies or funds to invest in, following up on their goals, and considering your own values when selecting where to invest. When building your own ethical investment portfolio, it’s important to first consider how active or passive you want to be throughout this process as this can dictate which type of ethical investments you choose.
To build your ethical investment portfolio, you’ll need to start by researching potential investments that align with your values. For active investors, this might mean looking for individual stocks of companies that reflect your ethical concerns, such as sustainable practices, human rights, or social responsibility. You can find this information in sustainability or corporate responsibility reports that many companies publish.
If you prefer a more passive approach, you can explore ESG funds or ETFs, which allow you to invest in a variety of socially responsible companies without needing to pick individual stocks. ESG funds are curated based on environmental, social, and governance factors, giving you an easier entry point into ethical investing.
When selecting investments, it’s helpful to create a personal list of values you want your investments to reflect. Use tools like the Morningstar ESG Screener to evaluate how well companies or funds align with your ethics. This will help you stay informed and make investment choices that reflect your personal values.
Just like conventional investing, diversification is key to managing risk in an ethical investment portfolio. Diversifying across different industries and asset classes helps protect your portfolio from market fluctuations, and this applies whether you’re investing ethically or not.
When constructing your portfolio, aim to balance individual stocks, mutual funds, and ETFs that align with your values. For individual stocks, research public reports to evaluate each company’s sustainability efforts or social impact. Many companies publish regular reports on their ESG goals, allowing you to assess whether they meet your standards.
For mutual funds, consult with your broker to find options that match your ethical criteria. Tools like As You Sow can also help you analyze the ESG scores of specific funds and determine if they hold investments in industries you may want to avoid, such as fossil fuels.
Maintaining a diversified ethical portfolio ensures that your investments reflect your values while still protecting your financial interests. This balance between financial performance and ethical responsibility is crucial for long-term investing success.
There is no longer any reason to shy away from ethical investing. In fact, more recent data and reports suggest that many ESG investments actually outperform conventional ones and also tend to come with less risk and volatility. When you’re ready to add ethical investments to your portfolio, be sure to update them in your Vyzer account as well so you can track their progress and see how they’re performing compared to your other traditional investments.
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