Investing is usually an opportunity to make earnings and gain multiple-fold returns. However, investing habits have also slowly changed with the growing focus on sustainability, ethics, and creating an overall better future.
Ethical and sustainable investments, also known as green, socially responsible, or impact investment, are becoming increasingly popular. These terms are often used interchangeably, referring to investments made with the intent to benefit society and have a positive impact in some form.
Despite their similarities, ethical and sustainable investing aren’t necessarily the same thing. Here’s everything you need to know about each investment type to make lucrative investments that align with your vision!
What Is Ethical Investing?
Ethical investing is a relatively subjective manner of investing where you exclude investments that go against your personal ethics, values, or moral codes.
In this form of investing, you avoid companies that do not align with your principles or harm society or the environment.
A “negative screening” process helps eliminate or filter out these organizations. This includes all kinds of harmful industries such as fast fashion, gambling, tobacco, weapons, or any other things that don’t sit right with your own values.
There is no real way to measure what does or doesn’t count as ethical investing, as there is no societal consensus on a reference framework. It varies from one individual to the other, and you can choose which controversial activities you will abstain from encouraging through your investments.
Types of Ethical Investments
Ethical investment portfolios can be extremely vast and unique, as everyone has a different idea of what they consider “ethical”. As a result, there are several different types of ethical investments to choose from:
- Single stocks: These give you complete control over your investments, unlike mutual funds or index funds.
- SRI Funds: SRI funds are a category of ETFs and mutual funds that avoid industries that are commonly considered bad, harmful, or undesirable. They focus on investments that are aligned with the fund’s requirements.
- ESG Funds: ESG investing is more focused on tangibly sustainable companies, but these can overlap with ethical investment ideals, depending on your ethical standpoint. Therefore, investing in an ESG fund can also qualify as a type of ethical investing.
What Is Sustainable Investing?
Sustainable investing refers to a method of investing that excludes activities that explicitly harm the environment. Instead, it gives monetary support to organizations that seek to conduct their business environmentally conscious and eco-friendly, which benefits society at large.
Companies that can demonstrate how their practices and policies cater to environmental, social, and governance (ESG) betterment focus on this type of investment.
Sustainable investing is a more streamlined investing method. It has a framework or outline that can determine what does or does not qualify as “sustainable”.
Companies with a diverse workforce that don’t produce too much waste, follow environmentally-conscious policies and practices, and have a transparent relationship with the public are preferred.
How Potential ESG Investments Are Evaluated
Those looking to make sustainable investments usually pay attention to the environmental impact, social responsibility, and the quality of a company’s internal governance mechanisms. If these practices are deemed sustainable, the company in question receives funding.
Environmentally sustainable companies usually ensure that their manufacturing processes and policies are eco-friendly. They may also work to eliminate waste, use renewable energy, and improve their recycling efforts.
A socially sustainable business actively tries to improve diversity and make racial and gender equality a norm in its workplace. While this is now the bare minimum for a company to be socially sustainable, some organizations go a step further to promote social sustainability.
Some steps that socially sustainable companies take include donating to social welfare organizations and causes, encouraging employees to volunteer, and being actively involved in communities.
The sustainability of corporate governance is evaluated based on how the leadership and management function behind the scenes.
An organization’s policies dictate how its board members and executives collaborate, the salaries of leaders and subordinates, financial auditing, and other aspects of the company.
A sustainable corporate governance, therefore, depends on how strong a company’s policies are in the aforementioned areas.
Companies with strong policies will pay workers fair and livable wages and encourage transparency across all levels. They also have a humane and sustainable functioning that doesn’t exploit employees.
Investments are opportunities to drive positive change, in line with the growing interest in sustainable and ethical practices.
Ethical investments are highly subjective, depending on each investor’s code of ethics. On the other hand, one can evaluate sustainable investments based on quantifiable or tangible factors.
Sustainable and ethical investments can overlap in some ways, but what a particular investor considers ethical is not necessarily sustainable. The two differ in this crucial aspect.