Achieving More Than Just Profit

Ethical investing is an approach that includes environmental, social, and governance (ESG) criteria, and is becoming increasingly integrated into the financial services sector. Whether applied via socially responsible investing (SRI) screening, ESG integration, or impact investing, ethical investing offers an ever-increasing range of options for investors interested in striving for more than just capital growth when advancing their portfolios. Socially Responsible Investing allows investors to reward those companies that are working to create a sustainable future economy.

What is it?

Through ethical investing, investors can contribute to making a positive impact on the environment, and society in general, as well as potentially improving the risk/return characteristics of their investments by incorporating environmental, social and governance (ESG) conditions into their investment decisions.

Aims:

  1. Promote positive environmental, social or governance practices
  2. Make investments decisions in harmony with your personal values
  3. Potentially increase investment risk/return characteristics

Intended Result:

Whereas traditional investing focuses on generating returns and philanthropy benefits charities and good causes without considering the performance, ethical investing looks to achieve both in differing degrees along with a range of possible outcomes.

What are the methods?

While there is a common premise of investing with a higher purpose, there are a variety of strategies that can be applied to ethical investing, especially in how they are put into practice, and typically uses one or more of the following methods:

Negative screening:

  1. Regarded as the original responsible investing technique
  2. Also called socially responsible investing (SRI) or exclusionary screening
  3. Disregards specific companies or whole sectors from investment if their business interests oppose an investor’s values, such as fossil-fuels, arms production, gambling or tobacco
  4. Restricts possible investment options, which can negatively affect the ability to diversify

Integration

  1. Combines ESG standards with established financial concerns
  2. Increasing in popularity as investment managers incorporate ESG standards in their investment selection process
  3. Sometimes employed as a superior approach by identifying and investing in companies that are the highest ranked ESG performers in a sector or industry grouping

Impact investing

  1. Aims to generate a measurable, beneficial social or environmental impact together with a financial return
  2. Provides funding to address social and/or environmental issues
  3. Uses money and investment capital for positive social results
  4. Accredited investors and funds are the front-runners in impact investment by asset value

Other aspects

  1. Subject/theme-based investing – concentrates on a particular ESG subject or theme, and creates a portfolio by investing in companies or sectors that support that topic
  2. Shareholder activism – actively engages with a company, directly working with upper management or using shareholder rights to drive change

Why consider it?

Investors are increasingly looking at pursuing effective global stewardship in addition to seeking capital returns. Ethical investing, when integrated into a long-term investment plan, can be a potent instrument in tackling global challenges while still achieving personal financial objectives.

Investors could consider ethical investing for many reasons:

  1. Risk Reduction: Businesses that disregard their social and environmental impact may face regulatory and governance risks.
  2. A more responsible way to invest: Investors may want to contribute to positive impacts or steer clear of being linked to questionable activities
  3. Longer-term performance: Companies with a poor reputation or questionable business practices may not be ethical.
  4. Alignment with personal, moral, or religious views: Investors may not wish to invest in companies whose business practices or products they oppose
  5. Fiduciary duty: Professional investment managers have an obligation and responsibility to invest within clearly defined standards that align with their clients’ interests, which would make investments in companies with unethical practices less suitable.