How to Invest Ethically

How to Invest Ethically

Ethical investing is the practice of basing your decisions on where to invest your money based on your ethical principles. What constitutes an ethical investment varies depending on the investor. Often, the term “ethical investing” and “socially conscious” or “socially responsible” investing is used interchangeably.

The difference between them is socially-conscious/socially-responsible investors use a prescribed set of guidelines for evaluating investments, whereas ethical investing is a more personal practice.

The steps to investing ethically are simple. First, define your criteria, then locate investments meeting those criteria. Finding investments aligning with your ethical principles may not be difficult. Determining which of those investments can make you money is much more difficult. Fortunately, ethical investors today have a lot of options to choose from.

Ethical and socially responsible practices are becoming more prevalent in the industry. U.S. News reported $8.7 trillion worth of assets under professional management incorporating factors like corporate governance, weapons avoidance, human rights and climate change into their investing strategies in 2016. Meanwhile, the Callan Associates consulting agency studied 84 funds and revealed that 37 percent of these funds, with total assets worth about $843 billion, applied social, governance and environmental criteria into investing decisions.

Define Your Criteria

The first and most important step to investing ethically is to decide what ethics matter to you in your investing decisions. Examples of just some of the principles you may decide matter to you in where you invest your money include the following:

  • Environmental Issues – Such as companies using recycled and renewable materials in their practices or involved in environmental solutions to everyday problems.
  • Religious Beliefs – Such as organizations whose owners are proud practitioners of a religion or businesses involved in supplying, building or otherwise supporting religious institutions.
  • Political Affiliation – Such as companies owned by those with a political affiliation or company practices aligning with your political beliefs like diversity in hiring.
  • Industry – Such as businesses not involved in the proliferation of firearms, alcohol, gambling, cigarettes or other “sin” industries.
  • Social Factors – Such as community involvement or a commitment to human rights.
  • Labor Practices – Such as hiring policies, employee pay and workplace practices and environment.

Often, ethical investing is as much about finding the businesses and other investments to avoid investing in as it is about finding the ones to invest in. Once you know the principles you wish to use to guide your investing decisions, you can search for companies and other investment vehicles to invest in aligning with those principles.

Evaluate Companies

Defining your ethical criteria is, unfortunately, the easy part of investing ethically. The harder part comes in evaluating companies to find ones meeting your ethical criteria. Reading a company’s message and operating guidelines is a good way to get an idea of a company’s focuses and values. Reading its regular quarterly and annual reports can help you analyze how much and how well the company implements its values in its business practices. Of course, all this information comes from the company itself, which makes it inherently biased.

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Not all companies live up to their own standards. It is also useful to read third-party analyses and investigations of the company, such as newspaper and magazine articles and broker and relevant oversight agency reports on the company. Fortunately, many online brokers also offer convenient filters for various ethical criteria in their stock screeners. Simply select the criteria most important to you and review the results. If you get too many results, simply refine or add criteria. If you do not get enough results, loosen or remove some criteria.

Apply Standard Investing Criteria

As you evaluate companies, remember, your ethical criteria may be your primary filter for identifying and ruling out companies, but your evaluations cannot stop there. To determine which ethical companies make wise and potentially profitable investments, you must then analyze each company according to common, proven investing standards. The two most common forms of analyzing investments are fundamental and technical analysis. Fundamental analysis focuses on a company’s prospectus and financial statements.

Technical analysis focuses on a company’s performance on the stock market. You may choose one or the other form of analysis to evaluate your choices or you may choose both. Just do not choose neither and skip this step altogether. Too many investors lose money in both ethical investing and regular investing alike by making decisions on instinct, impulse, recommendations and other non-scientific methodologies. Do your due diligence and make sure each ethical company you identify is worth your investment.

Use Ethical Investor Tools

Many organizations have developed tools to help ethical investors identify the companies aligning with their principles. Among these tools are screeners and indexes including:

  • Global Reporting Initiative (GRI) – Develops reports on companies’ social responsibility, including environmental fines, contracts that underwent human rights review, employee with collective bargaining coverage and other sustainability issues.
  • Social Funds Corporate Research Center – A search tool revealing independently created profiles of companies focused on their history in relation to social responsibility.
  • American Customer Satisfaction Index (ACSI) – Identifies companies with high customer satisfaction levels on factors of customer loyalty, customer complaints, perceived quality and value and customer expectations.
  • Calvert’s Social Index and Know What Your Own Service – Two services are available from Calvert, an investment research firm and brokerage focused on responsible investing. The former pares down the 1,000 biggest companies in the U.S. into those meeting standards of ethics and governance, environmental stewardship, product impact and safety, workplace quality, internal operations, community relations and indigenous peoples and general human rights. The latter lets you search mutual funds based on issues you care about.

Consider Funds

As you can imagine, one of the greatest challenges many people have with investing ethically is all the time-consuming research involved in finding companies meeting their ethical criteria. Even using stock screeners to find investments takes time. Before letting this discourage you from your desire to invest ethically, give mutual funds and ETFs some consideration. You can find specialized funds and ETFs using  the same or similar ethical criteria themselves in identifying the investments they contain.

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By Admin