Ethical investing involves selecting investments based on moral principles, like social or religious values, alongside financial returns. It aims to support positively impactful industries, such as sustainable energy, and often overlaps with ESG investing. Investors avoid sectors conflicting with their values, like tobacco.
One of the most fundamental rules of choosing investment options for your portfolio is that they should align with your objectives. These objectives need not always be limited only to your financial goals. It is also becoming increasingly common to choose potentially rewarding investments that also align with your ethical beliefs and value systems. This has given rise to ethical investing.
In this article, we look into the meaning of ethical investing, the types of investments that align with this strategy and how you can build an ethical investment portfolio.
What is ethical investing?
You may have some individual ethical and moral principles that you may adhere to or some causes that you support. Ethical investing is the process of choosing investments that align with these beliefs and principles. For example, say you are passionate about organic farming. You may then choose to invest in companies that support this endeavour in different ways, either by manufacturing equipment or by offering financing solutions to organic farmers.
An example of ethical investing
One example of ethical investing is choosing companies that aid and assist in microfinancing, which aligns with the principles of social justice and poverty alleviation. In microfinance-oriented ethical investing, investors use their capital to purchase shares or debt instruments in institutions that offer small loans to entrepreneurs in developing countries. These loans help individuals start or run their businesses.
Indirectly, they also support the local economy and improve the living standards for people. By targeting underserved communities, microfinance promotes social justice and reduces financial inequality. It also empowers borrowers and directly addresses poverty by providing the resources needed for sustainable economic development.
Understanding how ethical investments work?
Ethical investments can be made either by a process of elimination or by a process of inclusion. In the former, you actively choose to avoid investing in certain unethical companies or sin stocks. These are companies that have been involved in unethical practices that you do not condone.
On the other hand, ethical investing through the process of inclusion involves selecting investments that align with the principles you support. This means you actively look for stocks issued by companies that match your ethical code. Both strategies can be effective depending on the nature of the values you want to base your investments on.
Types of ethical investments
Depending on the kind of ethics they align with, ethical investments can be grouped into different categories. Some common types of ethical investment options include the following:
- Socially Responsible Investing (SRI) funds
These investments focus on companies that are socially responsible in terms of their operations, objectives and general business practices. - Environmental, Social and Governance (ESG) funds
These ethical investments prioritise companies that adopt the best practices in environmental, social and governance aspects. Read more about, What are ESG mutual funds. - Impact funds
These investments include stocks that have a positive impact on the environment or society and also have the potential to generate high financial returns. - Faith-based funds
Investments in this category focus on stocks that meet various religious ideals held by investors and avoid investing in other companies that do not meet this criterion.
Advantages of an ethical investing strategy
Adopting an ethical investment strategy can be beneficial to investors, markets and economies in many ways. This type of investment may be advantageous because it:
- Aligns your investments with your personal values
- Promotes positive social and environmental change
- Encourages responsible corporate practices
- Attracts socially conscious investors
- Reduces exposure to industries with any kind of negative impact
- Supports community development and empowerment
- Fosters a sense of purpose in investing
Steps to build an ethical investment portfolio
To build a portfolio that adheres to the philosophy of ethical investing, you can follow the steps outlined below.
- Identify the ethics that guide your investments
Begin by identifying the ethics according to which you wish to invest. Is there any cause you wish to support via your investments? Or are there any malpractices that you do not wish to be a part of? The answers to these questions will help determine the approach needed. - Assess ethical investment options
Based on the ethical code guiding your investments, identify companies that fit the criteria you have in mind. The stocks of these companies may be suitable investment options for you. Alternatively, mutual funds that invest in such companies may also be ideal. - Compare and make informed choices
Compare the different investment options that meet your ethical criteria. Narrow down your options to those investments that have a higher potential to deliver significant returns. This will ensure that your portfolio is capable of being ethically and financially rewarding.
Is ethical investing suitable for you?
Before you decide to adopt this strategy, you need to assess if it will work for you. Typically, ethical investing may be a suitable choice for you if:
- You want to align your investments with your values and beliefs
- You want to support companies that prioritise social responsibility and environmental sustainability
- You seek to make a positive impact on society through your investment decisions
- You are interested in contributing to specific causes like fair labour practices, community development or ecological conservation
- You strongly believe in the importance of ethical business conduct and corporate governance
- You have the time and the expertise needed to conduct the due diligence required to identify opportunities for ethical investing (mutual funds are an easier alternative)
- You are open to exploring diverse sectors and industries provided the stocks align with your ethical investing principles
Limitations of ethical investing
Despite its many benefits, ethical investing also has certain limitations, as outlined below.
- Limited investment options available
- Potentially lower financial returns compared to traditional investments
- Difficulty in assessing the true impact of companies
- Subjectivity in defining what is considered ethical
- May require more time and research
- May exclude high-performing sectors like tobacco or fossil fuels
Conclusion
If you want to incorporate ethical investing in your strategy, ESG mutual funds and ethical funds may be some suitable options to consider. The Bajaj Finserv Mutual Fund Platform makes these investments easy and quick through hassle-free online applications. What’s more, with more than 1,000 mutual fund schemes to select from, you can find the scheme that aligns with your ethical beliefs without any trouble. Then, all you need to do is choose between making a lump sum investment or starting a SIP investment.
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