Before understanding what exactly ethical investing is, one must first have a fair idea about general investing. The act of investing is basically placing optional funds to work with the expectation of using it in future. In lieu of saving funds, an investor must get some kind of compensation. In order to evaluate as to how an investor must be compensated, two decisive factors are taken into consideration – risk and reward.
Calculating Risk
The risk factor is the amount of risk that an investor is ready to face in order to receive certain compensation. By the rule of thumb, a risk in any investment increases as the amount of uncertainties increases. It is up to an investor to decide the amount of risk he/ she wants to go through. There are basically three kinds of investors, when it comes to the risk factor. First is the risk-averse investor. They are the person who does not want to take any risk. Second is the risk-neutral investor who is keen on taking a certain amount of risk so as to receive a specific amount of returns. Third is the risk-loving investor who is willing to take any amount of risk in order to receive large amounts of benefits. The reward factor is the preferred amount that an investor would expect to receive from a particular investment. Both the factors of risk and reward are entwined intensely owing to the fact that reward increases with risk.
What is Ethical Investing ?
Ethical investing has the two factors of general investing and a third one – responsibility. The act of investing money in an ethical way that pertains to human rights and sustainable finance can be termed as ethical investing. It is also known as Socially Responsible Investing. There are companies that have shown intense concern regarding the environmental crisis that planet earth has been facing the past few years. They have taken into account an ethical side of the issue by putting forward sustainable finance for the purpose of preserving natural resources and tackling environmental crisis. A typical ethical investor would avoid companies that violate human rights in their corporate ventures. An apt example in this regard would be the case where an ethical investor does not invest in a company that deals in tobacco products. They would not do anything that proves to be burdensome for the earth’s environment or people’s health in any way. Read more – Environmentally friendly & ethical stocks guide from AskTraders.
Investing Methods
There are two broad methods of performing ethical investing. They have been discussed below.
1. Avoidance of unethical investing
This is a very important part of performing ethical investing and determining your investing strategy . An ethical investor must not put forward any amount of investment for companies that do not abide by the ethical standards of business. Then again, there is a common feeling among all the investors that it is difficult to assess companies on the ground of ethics as every individual has their own way to judge what is right and what is wrong. There are, however, certain basic values that every ethical investor will agree on. They are –
Avoiding investing in any product that can cause disease, ailments and even death.
Avoiding investing on anything that can result in destruction or damaging environmental properties.
Avoiding investing in any purpose that involves disrespecting honest individuals.
With the help of these moral values, it becomes easy to evaluate certain standards that ethical investors must follow.
2. Choice of positive ethical investment plans
As an ethical investor understands how to avoid investing in unethical ventures, they can invest their money in a way that can benefit the environment is some way or the other. Investing in green stocks is a common practice of ethical investing these days. An ethical investor can consider adding green stocks in their green investment plans.
It is important to maintain the focus on effects that a company’s services and products can have on the society and the environment. It is also recommended to opt for companies that offer services/ products that promote environmental benefits, health and treatment of ill people. There are several mutual fund investments that offer societal advantages, like, cleaning the environment, sustaining human rights and many more.
Remember though, it may not be possible to find an investment plan that satisfies all of the above criteria. However, there are still many plans that can come very close to satisfying the ethical needs of an investor.
So, how do you invest? Is being ethical and sustainable important to you?
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An Overview of Sustainable & Ethical Investing — 7 Comments
Interesting post. In fact, I’ve seen these types of posts before and always find them intriguing. May I add another perspective? Hearing no objections, here I go in a brief form:
Personally, I don’t give much thought to “ethical” investing as you’ve described here. Perhaps another approach is this: I strive to live an ethical life, supporting those in need, especially in areas of the world that are exploited by others. When I invest, I attempt to make as much money as possible through these investments, not giving much thought to the ethics of the company. Then, I turn around and invest some of this money (through donations, charity, sponsorships, etc) to those who are likely impacted by the unethical decisions of these companies.
Personally, I’m not convinced we have the ability to determined the ethics of these multinational companies… so, rather than trying to do so and slow them by my lack of purchasing their products, I simply make money from their successes and pass those profits back to those in need, likely affected by those multinational companies.
I suppose they both have merits… and it’s likely a chicken/egg thing. I guess I know I can affect the lives of individuals, but I’m not convinced my ethical purchasing could impact those same lives.
@Doctor Stock. Thanks for such a thought out response. You definitely have a good point and yes this option is possible. I really like your idea about donating money to important causes using your investment money. I think a person has to do what is best for their concious and how they feel. Both options are good. With these posts I am really just trying to get people thinking about the causes of their actions; that what they do has impact. I basically want to wake people up to thinking about how their actions affect the rest of the people on this planet and through investments we can work collectively to do some good. Thanks for sharing such an interesting perspective.
I’ve been interested in both ethical and sustainable companies. However, by investing in them you need to realize that most put the sustainable business model above the profit business model, which may hinder returns. Both should always be ethical though!
@Robert. Good point. Yes by being sustainable you don’t always turn out the best profits. But this is ok with me. I would rather have my investments make a bit less and support a good cause then to make “dirty money” so to speak.
Good post. I have to say I really only look at numbers while investing. If the company makes money, they look attractive to me.
On the contrary, as a consumer, while I’m looking to purchase certain goods I DO think about the company. For instance, I enjoy supporting companies such as Toms Shoes.
@Funancials. If that works for you then that’s great. I personally like to be careful where my money is going and supporting. I do this with my shopping choices and my investments. To each his own though.
Interesting post. In fact, I’ve seen these types of posts before and always find them intriguing. May I add another perspective? Hearing no objections, here I go in a brief form:
Personally, I don’t give much thought to “ethical” investing as you’ve described here. Perhaps another approach is this: I strive to live an ethical life, supporting those in need, especially in areas of the world that are exploited by others. When I invest, I attempt to make as much money as possible through these investments, not giving much thought to the ethics of the company. Then, I turn around and invest some of this money (through donations, charity, sponsorships, etc) to those who are likely impacted by the unethical decisions of these companies.
Personally, I’m not convinced we have the ability to determined the ethics of these multinational companies… so, rather than trying to do so and slow them by my lack of purchasing their products, I simply make money from their successes and pass those profits back to those in need, likely affected by those multinational companies.
I suppose they both have merits… and it’s likely a chicken/egg thing. I guess I know I can affect the lives of individuals, but I’m not convinced my ethical purchasing could impact those same lives.
@Doctor Stock. Thanks for such a thought out response. You definitely have a good point and yes this option is possible. I really like your idea about donating money to important causes using your investment money. I think a person has to do what is best for their concious and how they feel. Both options are good. With these posts I am really just trying to get people thinking about the causes of their actions; that what they do has impact. I basically want to wake people up to thinking about how their actions affect the rest of the people on this planet and through investments we can work collectively to do some good. Thanks for sharing such an interesting perspective.
I’ve been interested in both ethical and sustainable companies. However, by investing in them you need to realize that most put the sustainable business model above the profit business model, which may hinder returns. Both should always be ethical though!
@Robert. Good point. Yes by being sustainable you don’t always turn out the best profits. But this is ok with me. I would rather have my investments make a bit less and support a good cause then to make “dirty money” so to speak.
Good post. I have to say I really only look at numbers while investing. If the company makes money, they look attractive to me.
On the contrary, as a consumer, while I’m looking to purchase certain goods I DO think about the company. For instance, I enjoy supporting companies such as Toms Shoes.
@Funancials. If that works for you then that’s great. I personally like to be careful where my money is going and supporting. I do this with my shopping choices and my investments. To each his own though.
Yes, You touched on some great point here.
I would rather make small profits and build my portfolio bit by bit.