Ethical investing

Quick definition

Ethical investing is when you avoid investing in things that you feel are harmful to society or the environment.

Key details

• When you are ethically investing, you use your own moral principles to guide your selection of the things you invest in.
• In recent years, institutional investors have started to prioritise environmental, social, and governance (ESG) issues when making investments. In fact, some popular companies like Nike have been listed as the best ESG stocks to invest in.
• There is no guarantee that prioritising ethics will enhance your returns.

What is ethical investing?

Ethical investing is the practice of investing solely in companies and other assets that align with one’s own moral compass. True ethical investors don’t just look at the industry a company occupies; they also dig into the company’s historical actions, business strategy, mission statement and future direction. 

The different motivations for ethical investing

The focus of ethical investing varies by individual. For instance, investors who care about environmental issues may avoid investing in coal, oil or other fossil fuel stocks and instead focus on areas like renewable energy. Moreover, they may also avoid investing in controversial commodities like uranium and materials obtained through mining like gold.

In addition, cryptocurrencies – especially Bitcoin – have experienced controversy due to their allegedly elevated energy usage, leading some ethical investors to add certain cryptos to their blacklist. Investing with a focus on environmentally-friendly stocks and assets is called green investing. 

Away from environmental concerns, some ethical investors have religious motivations for their decisions, and as a result, they will avoid ‘sin stocks’ like companies involved in gambling, alcohol, smoking, firearms, or adult entertainment. 

Additionally, some investors will look at the geopolitical factors behind a company’s existence. Are individuals being exploited for their labour in developing countries? Are corrupt governments profiting from a company’s practices? Does the company pay its full tax bill? These are just a few of the social and political considerations one may make when ethically investing.

Furthermore, there are some investors who invest in sectors that will generate specific beneficial social or environmental effects while also providing returns. These people are called impact investors. For example, if a company plans to expand its operations and create good-paying jobs and expanded infrastructure in a poor economy, it might be a target for impact investors. 

There is significant evidence that ethical companies are now receiving greater attention from the world’s biggest asset managers. This is best exemplified by the surge of capital into renewable energy enterprises and the introduction of rating systems by major asset managers, which ranks companies based on environmental, social, and governance issues.

Should you ethically invest?

The truth is that moral decisions aren’t always conducive to the best returns in an investment setting. As a result, if your sole motivation is generating profits, ethical investing shouldn’t necessarily be your top priority. However, if you can balance your focus between ethics and profits, you can feel a little better about your impact on the world and still generate returns.  

Where can I learn more?

To learn more about ethical investing and related topics, we highly recommend checking out our stocks, cryptocurrencies and commodities hub pages.