What is Ethical Investing?

What is Ethical Investing?

Ethical investing. Who, or what determines the ethics of an investment? And what does that even mean? Is it different than impact investing? Sustainable investing? Green investing? Socially responsible investing? Which investments are more ethical, or more sustainable, or more socially responsible? Which are better… for you?

For that matter, who is an investment supposed to be good (or better) for? And what does “better” mean when ethics, impact, sustainability or social responsibility factor in?

What is Ethical Investing?

In general, the gist of ethical investing is this: Making money while following your conscience. Because, really, why does saving for the future have to mean ignoring our personal ethics and social values?

More specifically, it “is an investment discipline that considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact,” (The Forum for Sustainable and Responsible Investment).

This seems clear on the surface (maybe). But it isn’t clear when we ask yardstick questions like “How do you measure societal impact?” (definitely). More on that later.

Questions We Should Be Asking About Our Investments

It is always a good idea to further your financial learning, so ethical investing aside, knowing the who, what, where, why, and how of your financial planning is important.

Who is helping you plan your finances, and how? Do they have a good reputation? What are you investing in and where? Certain funds? Commodities? 401k? Locally, abroad? Why are you investing in certain companies over others? To aggressively save? To ensure you have conservative growth?

Not everyone has answers to these questions, but once you open the proverbial can of worms, more and more considerations come to the fore.

Know What You’re Investing In

For example, how much does the average investor know about the companies in his or her portfolio? Are you going to make financial planning/investing decisions based on strategy alone, or are you going to incorporate personal values? Should you include a company that manufactures something considered morally reprehensible in your investment portfolio? Or, do you invest in organizations who focus solely on initiatives that benefit society and the environment? These aren’t easy questions to answer, but the answers to them will have an impact.

The Yardstick for Ethical Investing

Which brings us back to an earlier question: How do we measure societal, sustainable, responsible, or ethical impact in our investments?

On a personal level, our conscience is the best barometer for ethics.

But at a higher, more accountable level, investors use GIIRS (pronounced “gears”), the Global Impact Investing Rating System, which provides “investors with a comprehensive, comparable, and third party-verified assessment of companies’ and funds’ social and environmental impact,” (“Making Every Dollar Count: Investing for Impact and Return”, Forbes).

Does Ethical Investing Work?

Can ethics drive business growth? This is a concern many investors have with so-called ethical investing. Can you be conscientiously capitalistic?

Numerous studies have shown that you can do just as well, or even a little better by incorporating environmental, social, and governance issues into investment decision-making,” says Tim Nash, The Sustainable Economist. “It bears the question, ‘if you can make just as much money and feel good about your portfolio, why aren’t more people doing this?’”

Before Etsy, an online marketplace went public, there was legitimate concern that the company’s community focus wasn’t compatible with profitability.

“We understand the concern, but reject the premise,” Etsy’s CEO wrote in a blog post published the day of the company’s IPO in 2015. “Etsy’s strength as a business and community comes from its uniqueness in the world and we intend to preserve it. We don’t believe that people and profit are mutually exclusive.”

“Idealism is one of the company’s most important attributes,” says venture capitalist Charlie O’Donnell (“The Barbarians Are at Etsy’s Hand-Hewn, Responsibly Sourced Gates,” Bloomberg) “This is something a lot of investors miss and don’t understand is an asset,” he says. “It does translate into growth.”

Every Dollar Counts

There are two important lessons we should take from ethical investing: First, your investment decisions have an effect. And not only on your own financial growth.

The more people start to consider things like social and environmental impact in their investment choices, asset management firms, and the like will take note and address the need for sustainable, ethical investment products.

You Are an Investor

Secondly, it’s important to realize that we are all investors.

When we say investment, we usually think in terms of dollars and cents.

But we invest in our careers, our health, our children. As such, we need to ask the right questions. When it comes to a career, should we invest in training and more education?

When do we start thinking about retirement plans? What should we invest in? Why? How?

When it comes to saving in general, should we pay off student loans early, or put together an emergency fund for a rainy day?

And speaking of a rainy day, when it comes to our health, we need to start asking questions like disability insurance – yes or no?

As noted, many don’t consider themselves “investors,” but saving and financial planning are just that: An investment. An investment in yourself, your family and your future, but also in the future of our community, of our planet.

And it doesn’t just mean sustainability, societal, or responsible impact. It’s about redefining success, and how we can invest it in. As such, it’s not only important to invest, to save and plan for your financial future, but it’s also important to pay attention to the hows and whys around our investment activities, whatever they may be.