What Is Ethical Investing & Why Do It

There’s no industry-standard definition of “ethical investing.” There’s not even an agreed-upon name for it. You’ll hear lots of different terms for it used interchangeably, even if there are (mostly agreed upon) subtle differences between them. These include, socially responsible investing (SRI), environmental, social, and governance (ESG) investing, sustainable investing, impact investing, values-based investing, conscious investing and green investing etc. With so many different things to call it, it’s likely no surprise that a portfolio manager can’t get certified in ethical investing. It’s not even regulated by the government per se, although advocacy groups are pushing governments to change that. The ethical investment portfolio of one investment-management company might involve a totally different slate of stocks than another.

If we don’t know what to call it and if no one’s in charge of what defines it, then how do we know if we’re engaging in it? Well, we don’t know. But you do. The only thing that determines whether or not an approach to investing is ethical or not is: you.

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What is Ethical Investing?

Ethical investing is any investment strategy in which you apply your values— social, moral, religious — to your portfolios and investment strategies. You likely do this with the help of lots of available resources and the guidance of a similarly-minded investment advisor, but we get to that.

Until as recently as a few years ago, you had to go it virtually alone by doing research on individual companies and crafting an ethical investment approach, strategy, and portfolio yourself. But with the explosive rise of consumer interest in this type of investing over the last decade, fuelled by the sensibilities and mindsets of millennials, many investment management companies offer ethical and socially responsible investing. This makes it much easier to invest in ethical companies now compared to five years ago. Some investment providers, even make ethical investing a prominent part of their marketing, making clear to consumers and the companies they recommend, that they consider the social value of investing as important as its financial value. And not just for investors, but for the companies themselves, and the world.

Ethics in Investing

There are dozens of approaches to ethical investing and many of them overlap. The one practiced most is based on simple avoidance: investment managers simply exclude companies deemed “problematic” by a large number of investors. These companies could be involved in industries such as firearms, tobacco, alcohol, or fossil fuels. Another approach is to focus on companies that actively and measurably seek to have a positive social or environmental impact. For example, companies that develop alternative energies, for instance, or retailers that work only with suppliers who engage in “fair trade” practices. There are faith-based approaches that place an emphasis on investing that aligns with values of certain religious groups — Catholics, evangelicals, or Muslims, for instance. Portfolio managers, financial advisors or investors like yourself may also consider climate change, human rights, the advancement of women, the advancement of minorities, and corporate political spending as you create a portfolio.

It’s important to note that while a large number of advisors will affirm that they can attend to your ethical investing needs (And why wouldn’t they? According to US SIF: The Forum for Sustainable and Responsible Investment, socially responsible investing grew 33 percent between 2014 and 2016), a much smaller number will disclose their specific strategies for executing ethical investments. Despite the rise in this type of investing, there remains a large gap between the number of investors seeking ethics-based investing and the number of advisors actually qualified and prepared to advise on such investments. Any advisor who claims to offer ethical portfolios will have detailed information on what resources they use to create and/or recommend products.

Ethical Investing in Mutual Funds

Ethical investing has become such a widespread concern among investors that mutual fund managers have responded accordingly. There is a vast array of products to choose from. There are mutual funds that only include companies that publicly adhere and espouse certain ideals. There are mutual funds in which a certain percentage of your investment goes toward community investment.

Because it is easy for a money manager to claim an interest in ethical investing, it’s important for individual investors to get informed.

There are various resources that can help you identify mutual funds made up of companies that align with your values. A money manager may employ its own criteria, although many useful resources such as the rating firm Morningstar which applies a socially responsible rating to mutual funds, helping advisors and investment managers recommend and/or package and sell certain products. US SIF provides a sustainable and responsible mutual fund chart. Other investors opt for investment portfolios that are designed specifically with their values in mind. For example, this socially responsible investing portfolio or this halal investment portfolio.

Many money managers apply standards on top of the standards provided by such research companies. A good rule of thumb for anyone seeing a company that advises on ethical investing: if a company has spent resources on catering to this need, such information will be easily accessed through their website.

Most robo-advisors are actively engaged in catering to ethical investors (and make ethical investing a prominent feature in their marketing to customers and potential customers, meaning you won’t have to look far). They offer mutual-fund portfolios for various ethical investment concerns, such as clean technology, gender diversity, and a low carbon footprint. Some robo-advisors have been specifically designed to address such needs.

Ethical Investing in Emerging Markets

Ethical investing in emerging markets — from Tunisia to Brazil to South Africa to China — can seem like a counterintuitive approach. After all, emerging markets—especially small countries — can be plagued by corruption, government unrest, and lax environmental standards. And there’s an inherent lack of financial reporting — or even reporting standards. Many of these countries are figuring things out as they grow. The disadvantages are clear — instability and a lack of clear direction or goals are rightly considered anathema to most investors.

The irony, of course, is that such markets are ripe to be influenced by investor demands. If enough advisors and investors make clear that ESG issues are a major factor in decisions to invest in emerging markets, those markets are as likely to consider such concerns as more established markets are — if not more likely. Companies may respond by disclosing more information and changing various practices. Government regulatory agencies may apply stricter standards to companies. Indeed, a growing number of ethical investors and advisors see emerging markets as a bright spot, and upstart sustainability rating companies like Sustainalytics are attempting to fill the gap, shedding more light on such markets, which allows advisors more resources for making recommendations to investors.

The Upshot

The rise of ethical investing (or whatever you want to call it!) is an immensely important trend. Not only is it empowering investors to engage in the market according to their values, not only is it allowing investors and investment management companies to have real influence over individual company’s and entire industries’ business social and environmental practices, but it is also helping foster a general transparency among businesses and markets. There are research organizations, rating firms, lobbying organizations, and new governmental requirements ensuring that consumer needs are heard and met. Ethical investors are changing how investment managers think and how entire governments act—and how small nations and emerging markets grow and become more stable.

The hope for ethical investors, of course, is that a distinction such as “ethical” or “socially responsible” or “values-based” become unnecessary. The trend is working in their favor. And ethical investing is becoming more and more normalized and part of the basic array of services that investment managers and financial advisors offer. There are more resources available to investors, more companies publicly engaging in ethical practices and espousing socially responsible values. All of these things are working in concert to create a more ethical investment environment generally.

A common criticism of ethical investing (or any “niche” investing practice) is that it limits an investor’s scope. This is true, of course. It necessarily excludes certain companies. But the great news is that ethical investment doesn’t appear to have any financial downside. By most metrics, ethical investments do as well as… for lack of a better term… non-ethical investments. Over time, ethical or SRI mutual funds have performed as well as so-called “regular” funds. Which is important, because what will determine if ethical investing ever becomes truly mainstream (if it isn’t already) is performance, of course.

The practical result for anyone interested in this kind of investing approach is: Ethical investing is no longer something that requires a high level of resourcefulness, knowledge, or individual research. Any respectable manager or advisor should be able to provide a detailed (and possibly impassioned) answer to a question they’re getting more and more often: “How can you help me invest ethically?”

Wealthsimple (that’s us) has a range of great investment options for ethical investors. This includes Socially Responsible Investing and Halal Investing portfolios. Get started now or find out more details about all of our portfolios here.

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