Ethical investing refers to the practice of using one’s ethical principles as the primary filter for the selection of investment assets. Today it is seen as one element of the broader investing approach of Socially Responsible Investing (SRI). With the increased attention given to climate change, achieving a just society and the desire for good health, particularly in the current Covid era, there has been a surge in interest in SRI. Investors want to understand the impact of their money, and they want it to enhance the world we live in as opposed to simply achieving monetary growth at any cost.
In this piece we’re going to describe a number of the different types of SRI, and then we’re going to consider one of the main challenges that is often raised in relation to SRI.
First of all, there are a number of different types or styles of Socially Responsible Investing. The three most common ones are,
- Sustainable Investing
- Social Investing
- Ethical Investing
This branch of investing is based around including companies that have a positive impact on the world in which we live and specifically the environment, while excluding companies that have a negative impact. We see these funds investing in the likes of renewable energy and responsible waste management companies, while excluding companies that have high carbon emissions or who produce ozone depleting or agricultural chemicals.
This type of investing is based around including investments in companies that have a positive impact on society, while excluding those who are seen to damage society. Funds that invest on a social investing basis will exclude companies that derive their income from or produce the likes of alcohol, tobacco, pornography or gambling.
While ethical investing will also be sympathetic to the above styles of Socially Responsible Investing, it will consider other factors too. This might entail excluding companies that use child labour, have poor working conditions or pay below minimum levels. Ethical funds may also exclude investing in a country as a whole – the best example being the avoidance in investing in South African companies during the Apartheid regime.
Turning our attention now to an argument that is sometimes levelled at Socially Responsible Investing, and that is a concern that investing in line with your principles costs you money in terms of a lower return from your investments. This argument is relatively easily refuted on a few counts.
First of all, as with all investments, there are underlying investment principles that must continue to be followed. These are first of all that investing in stock markets is only appropriate over the medium / long term without taking on significant risk. This equally applies to SRI investing. Also a diversified portfolio of assets is really important. A basket of SRI stocks will likely have similar performance characteristics to any basket of stocks, in that some will outperform, and some will underperform. We would never recommend investing in a single “dead cert” individual company, irrespective of whether it is socially responsible or not. Diversification reduces your risk. So don’t forget basic investment principles.
In fact there is a school of thought that says that companies that are really well run in terms of SRI principles also tend to be well run overall. As a result, they are more likely to tend towards outperformance.
Ethical investing or Socially Responsible Investing is more mainstream now. It allows investors the comfort of investing their money, while not compromising their own values. And it typically doesn’t cost in terms of returns.