Many of us make a conscious effort to do the right thing. We try to have our personal values guide our daily behaviors and decisions. As consumers, we do this by using our purchasing power to support businesses that align with our value set.
As investors, we have a similar opportunity. Investing ethically means you can design your portfolio for potential returns while also helping to promote your ethical beliefs. Let's take a deeper look at ethical investing, including four steps to make it happen, as well as the benefits and challenges of ethical investing.
What is ethical investing?
Ethical investing, sometimes called socially responsible investing (SRI), is an umbrella term that describes any investment strategy that incorporates moral beliefs into the process. This approach includes socially conscious investing and sustainable investing, as well as investing decisions that are impacted by other ethical factors, such as workers’ rights, animal welfare, corporate philanthropy or the general social good.
Ethical investing is not about ditching personal gain to make the world a better place. It’s more about strategic balance and striving to achieve both your financial and ethical goals with one strategy.
Regardless of your specific areas of interest, there are a few common techniques that could help you start the process of ethical investing. One technique is to explore investing in funds that support your views on the environment, consumer protection, religious beliefs, employee rights, animal welfare and more.
You can also explore adding ESG-focused companies to your portfolio, which focus on responsible "environmental," "social" and "governance” behaviors. ESG categories correspond to the following areas:
Environmental: Greenhouse gas emissions, water usage, use of renewable energy, recycling, reducing carbon footprint and more.
Social: Employee development, safety policies, diversity and inclusion, ethical supply chain sourcing, social justice issue responsiveness and more.
Governance: Executive compensation, ethical business practices, board diversity, shareholder communications transparency and more.
What are some of the challenges with ethical investing?
Ethical investing does pose some challenges, including the fact that it isn't an exact science. For example, some of the companies that market ESG funds may view their investments differently from how you would. So, they might not actually be as "ethical" as you assume. You may need to do some additional research to make sure that an investment does align with your beliefs and values.
Ethical investing also sometimes does not provide the returns you might want — you might receive less of a financial gain than you would if you invested in a non-ESG fund. One of the reasons you may sacrifice potential returns has to do with your expenses. ESG funds typically cost more.
What are the benefits of ethical investing?
Naturally, the main benefit of ethical investing is the feeling that you are supporting a cause that you care about. If your ethical investment is also financially beneficial, you get a double dose of "good" in that you could benefit both emotionally and financially. More and more companies have also started to offer easy access to ethical investments, which means that you have your pick of financial institutions to invest in.
How to start investing ethically
Let's take a look at some of the steps you can take to start investing ethically.
1. Define your ethical guidelines
If you’re interested in ethical investing, chances are you already have a strong moral compass. And you probably already have an idea of what you would like your investments to achieve, in terms of making the world a better place.
Either way, a good first step is writing everything down. Having a clear list of what you’d like to support (and avoid) with your financial resources will be helpful when you move on to finding the right investments for you.
Ask yourself: What are the types of things you want to avoid, and what are the things you’d like to invest in? Just for the sake of example, maybe you want to avoid investing in companies that utilize animal testing and support companies that have fair labor practices and active community support programs. These choices are entirely up to you, so make a list that is based on your personal beliefs.
2. Research what you already own
Once you have a clear vision of where you’d like your investments to be, it’s time to assess where you are today.
Start by researching the individual securities and funds you already own. Company websites are typically a great place to start. It’s common for a publicly traded company to have pages specifically for investors. You’re likely to find most of the answers you’re looking for within the investor relations pages, but you should still check out the consumer site as well.
There are a few types of information you can expect to see in a shift to SRI investing: community impact, commitment to workers, environmental responsibility and human rights.
It’s safe to assume that any information about the positive practices of a company on their investor website is correct and up to date. But we recommend taking this information with a healthy amount of skepticism. What could be missing here are any unethical practices that the company may not want to advertise to investors.
For this reason, a third-party opinion can be a great supplement to any information provided by the company itself. Using research from a reputable third party can help take some of the burden off you. Here are a few reputable sources where you can seek deeper insights or a second opinion:
Once you have an idea of whether you want to let go of any assets that don’t match your ethical requirements, you can start to create a new asset allocation plan. If you’re interested in buying new types of investments, this includes researching new stocks, mutual funds, etc.
If you’re starting from scratch, look for a list of top stocks focused on your area of interest published by a reputable company. These short lists can be helpful in giving you some direction or a place to start your research.
If you’d rather let automation do some of the work for you, you can choose an Ally Invest Robo Portfolio with an ESG focus and track companies with strong environmental and social records.
4. Keep in check with your financial goals
Over time, both the ethical and financial value of your investments may change. A good long-term goal for you could be maintaining a comfortable balance between the ethical implications of your investments and your potential returns. It’s critical to create some sort of process of check-ins to keep tabs on your portfolio, and your own ethical motivations.
There are a lot of interesting options out there and many products have been around for a while. It's a good idea to do a lot of research on your own and determine what makes sense for your personal situation. As the industry continues to evolve, you may find yourself with more options than ever before.