Ethical Investing How To Guide
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Never before has the concept of Ethical Investing been so important to so many people. In a recent study it was identified that 58% of 16-24 year old consumers place more emphasis on ethics, as do 49% of those aged 55 or older.
There’s an old adage about “voting with your dollars,” which refers to the impact people can have by deciding how to spend their money. An excellent example of this is how you decide to invest. Ethical investing can benefit not only your bottom line, but also the rest of the world.
Ethical Investing How To Guide
This article will explain what ethical investing is, why it is becoming more popular, and some of the best green investment strategies and opportunities.
What Exactly is Ethical Investing?
Ethical investing is the act of making investment decisions that are influenced by moral considerations. Whereas much traditional investing is solely concerned with which assets will rise in value to generate the most positive economic outcomes, ethical investors place a higher premium on what is morally and ethically correct, even if it means sacrificing the bottom line.
Ethical investing is also known as “socially conscious investing,” “green investing,” and “moral investing.” It can then be further subdivided into “renewable energy investing,” “pollution control investing,” and so on.
Ethical investing has a long history that dates back hundreds of years. Investment in anything that supported activities such as gambling, slavery, and prostitution was prohibited by religious beliefs dating back to the 1800s. As people questioned the necessity of war and the companies that helped facilitate it in the mid-twentieth century, ethical investing grew even more. Now, ethical investing is on the rise once more, as a new generation of investors enters the market, bringing with them a growing awareness of health and sustainability.
ESG, SRI, and Impact are the three main types of socially responsible investing. These investments vary in their emphasis on ethical behaviour.
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Investing in the Environment, Society, and Governance (ESG)
ESG investing is trading that considers environmental, social, and governance factors (detailed below) when making investment decisions. While ethical considerations are taken into account when making ESG investments, these are used to determine a company’s or fund’s profitability rather than their ability to positively impact the environment.
Investing with a Social Conscience (SRI)
SRI is the next level of ethical investing. SRI practitioners consider moral and ethical issues when deciding whether or not to support potential investment opportunities. These can be based on a wide range of political, religious, and life experiences. More on this in a moment.
Investing with a Social Impact
Theoretically, impact investing is the most altruistic form of ethical investing. With impact investing, traders go out of their way to invest in organisations and projects that they believe will have a positive impact on the world, even if it means foregoing profits.
What are the Three Corporate Sustainability Pillars?
ESG investing is influenced by three major factors known as the three pillars of corporate sustainability: environmental, social, and governance.
Environmental
Environmental factors include everything from animal testing and reliance on single-use plastics to poor pollution control, commitment to sustainable energy, and overall climate change mitigation. An ethical investor, for example, might not invest in a company or fund that promotes the use of coal or petroleum.
Social
As social media and other digital technology shine a light on global issues, these factors are becoming more prevalent. Human rights issues, labour exploitation, and businesses associated with tobacco and gambling entities are all examples of social considerations.
Governance
Governance refers to the leadership of an organisation or entity. This could include anything from how diverse a company’s leadership team is to how much and how transparent C-suite executives are paid. Funds that invest in companies with poor governance are frequently avoided by ethical investors.
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The SRI ETF Sector’s Growing Popularity
SRI exchange-traded funds (ETFs) have become a more popular investment option in recent years for a variety of reasons.
One reason for this is that a younger generation of investors is more aware of issues affecting the world around them. According to Morgan Stanley’s 2019 white paper, Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction, and Choice, 85% of US investors are interested in sustainable investing. In Australia, nearly $1 trillion of the $2.24 trillion managed by professional investors in 2019 was deemed responsible.
Another reason for the increase in socially responsible investing is that more SRI ETF funds have been created to accommodate the growing interest in investing according to the ESG parameters mentioned above. These funds are created through a rigorous screening process that delves into areas of interest for ethical investors. An SRI ETF, for example, could be made up of organisations and sectors dedicated to the use and production of renewable energy. Alternatively, there may be a fund comprised of organisations with diverse leadership boards or that employ other hiring practises that promote diversity and inclusion.
So, how effective is ethical investing? While much of responsible investing is based on moral standards first and foremost, there is still plenty of opportunity for profit. According to a 2019 report from the Responsible Investment Association of Australasia (RIAA), responsible investment funds outperformed their mainstream Australian fund counterparts over a variety of time frames. Morningstar International share funds and mainstream multi-sector growth funds were also outperformed by ethical funds.
Green Investment Possibilities
There are several key ethical investing sectors that you can dive into today if you want to do your part ethically, invest based on your religious or political beliefs, or simply add exciting new assets to your portfolio. Choose a cause that is close to your heart or a green investment opportunity that you believe has a good chance of success as the global debate about sustainability and the future heats up.
Here is a snapshot of the sectors in which you might want to start. But as with any investment, make sure you do your research to find the one that is best for you.
| Ethical Sector | Investment Opportunity |
| Water | Zacks Global Water Index |
| Water | First Trust ISE Water Index Fund (FIW) |
| Water | Invesco Global Water Portfolio ETF (PHO) |
| Wind Power | Vestas Wind Systems (VWDRY) |
| Wind Power | NextEra Energy Partners (NEP) |
| Wind Power | General Electric (GE) |
| Solar Energy | Enphase Energy (ENPH) |
| Solar Energy | Vivint Solar (VSLR) |
| Solar Energy | Sunrun (RUN) |
| Pollution Controls | Fuel-Tech (FTEK) |
| Pollution Controls | Invesco Cleantech ETF (PZD) |
| Pollution Controls | VanEck Vectors Environmental Services |
| Waste Reduction | Waste Management |
| Waste Reduction | Republic Services (RSG) |
| Waste Reduction | Covanta Holdings (CVA) |
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Ethical Investment Methods
Many successful traders base their trading decisions on an underlying investment strategy. While there are numerous investment strategies to suit various personalities, goals, and lifestyles, the following are a few of the most popular when it comes to ethical investing.
ESG Screening
When a portfolio manager or trader examines an asset or company based on the environmental, social, and governing factors discussed above, this is known as ESG screening. Its performance in these areas is used to determine how profitable it can be, rather than whether it should be excluded from any investment. This is similar to ESG investing in general in that it is more concerned with determining bottom-line success than with making a moral or ethical decision.
Negative Screening
Negative screening elevates ESG screening to new heights. You can choose not to invest in a fund if it invests in companies that have poor performance in environmental, social, or governing areas that are important to you. You screen or eliminate these funds as portfolio options.
Positive Screening
Positive screening, on the other hand, emphasises investing in funds with companies committed to making a positive difference in ESG areas. You give them more weight as potentials or go out of your way to include them in your portfolio.
Engagement Investing
When an investor attempts to make a significant change to a company or fund in which he or she is already invested, this is referred to as engagement investing. This can be difficult for most investors or fund managers because many do not own enough stock in a company or ETF to have a strong enough voice to effect change.
Impact Investing
Impact investing is when investors take the initiative and invest in companies or funds that they believe can make a difference while also paying out high dividends.
For a variety of reasons, ethical investing can be a fantastic option. You can feel good about your investments without jeopardising your morals or ethics, while also contributing to the betterment of the world around you. Furthermore, you can end up with some fantastic dividends, particularly as the world’s trajectory shifts towards more sustainable efforts.
Are you Ready To Start Ethical Investing?
Want to rekindle your trading passion by investing in renewable energy companies? eToro can assist you in doing so by offering a selection of ethical stocks and assets that can be purchased and traded online. And eToro’s trading platform adds another tool to your investing toolbox.
You can find people with similar interests, including those who are committed to investing ethically, using the platform’s Popular Investment Program. Then you can follow in their footsteps, adapting their investment strategies as needed. It is an excellent way to boost your self-esteem and confidence in your trading.
Your capital is at risk. Other fees apply.
