If you’re active in investing circles, ‘ethical investing’ is a term you’re likely to have heard more and more over the past couple of years. But it’s a very general term. Ethics can cover anything from supply chains to environmental matters to treatment of staff, and they all come down to the individual. In this post, we’re going to explore exactly what ethical investing means, how to identify ethical investments, and how you can make money in a greener, more sustainable way.

What is ethical investing?

Ethical investing – sometimes referred to as ‘socially responsible investing’ (SRI) – doesn’t mean supporting companies purely because they do good for the world, or “taking a hit” in the name of environmental plus points. The primary goal in choosing ethical stocks remains strong financial performance, but with an overlay of sustainable and social conscientiousness.

ESG and SRI investing

ESG (environmental, social, and governance) investing brings extra factors for analysis into an investment decision. Environmental factors include things like energy consumption, pollution, waste, and conservation. Social factors include human rights, labour practices, and staff and community policy. Governance includes analysis of management practices, transparency, and executive compensation.

ESG scores can be derived from annual Corporate Sustainability Assessments. This year, for example, Tesla’s ESG score was 22 out of 100. This is a great example of how a ‘green’ organisation with excellent carbon strategy (for which Tesla scored 99) can be let down by low-scoring management systems, staff development, and labour practices.

SRI is slightly more specific, in which an investor will be guided by a personal set of ethical guidelines. A socially responsible investor might eliminate any company that has links to child labour, tobacco or firearms production, or deforestation from their portfolio.

There is another division of ethical investing known as ‘impact investing’, in which a company must be making a positive impact on the earth to qualify for an investor’s portfolio.

Why is ethical investing important?

Ethical investing is important for two main reasons:

1. The threat of climate change has become impossible to ignore, and it is largely driven by the practices of large corporations. Seeing as these corporations are built on investment funds, where investors choose to allocate their funds has a unique and direct impact on the enablement of harmful corporate practices
2. Investing ethically not only benefits the planet, but it is likely to pay off for the investor long term. Companies that do not present strong sustainability policies are unlikely to succeed against the turning tide of environmental sentiment.

What are ethical investments?

Some examples of ethical investments might be tech or engineering firms that focus on green energy; organic or vegan food and farming companies; or sustainable builders such as Kingspan (LSE:KGP). You might choose to look at blended ethical funds – Royal London’s Sustainable Leaders fund being an excellent example. But what counts as ‘ethical’ depends on you, your beliefs, and your priorities.

How to build an ethical investment portfolio

Modern brokers will certainly be able to advise you on ethical mutual funds and screening tools, but if you’re investing independently, there are several metrics you can use to build an ethical investment portfolio.

1. Many companies voluntarily publish sustainability reports on their websites (here’s Innocent’s example from 2019). As with the Tesla example, all S&P companies have annual Corporate Sustainability Assessments which are public record.
2. Research organisations like Morningstar provide their own sustainability charts and ratings based on ESG factors.
3. Robo-advisers like Nutmeg provide ETFs specifically geared towards sustainability.
4. As you would with all potential investments, do your due diligence. A company may have built a strong sustainability profile through PR and brand messaging, but check what the experts say, and beware of greenwashing.

What is the future of ethical investing?

The future of ethical investing has already begun, with money held in ethical funds in the UK rising from £4.5 billion to £16.7 billion between 2008 and 2018.

Government studies have shown that between 60-70% of UK retail investors are concerned with companies’ SDGs (sustainable development goals), and want to know exactly how their money is being used, and how it’s impacting the planet. In other words, those who are unconcerned with a company’s impact are in the minority.

Do I have to choose between green and greed?

The bottom line is that when we invest in companies with harmful or unsustainable practices, we play a part in the harm that is being caused, however small. Capitalist philosophy that supports profit at all costs is rapidly falling out of fashion. However, because the tide is turning so dramatically, being an ethical investor no longer means you have to compromise on profit, or be an outlier. In fact, the studies are suggesting that those who don’t adopt ethical approaches may be left behind.