How do you know if your investments are ethical?
If people aren’t financing these companies by investing in them, companies that are destructive to the earth will either change their practices or cease to exist.
Are you wanting to be more mindful about where you are investing your savings? Have you been reading about ethical investing and are not sure what it means? Relative to traditional forms of financing, ethical investing is still relatively recent. Over the last few years, more people are choosing to be more selective about how they spend their money, and part of that is deciding where to focus their investments.
An ethically conscious investor’s objective is to stop supporting businesses that engage in activities harmful to people, animals, and the planet. The theory is that if people aren’t financing these companies by investing in them, companies that are destructive to the earth will either change their practices or cease to exist. These investors can focus on building a portfolio of companies that are proactively working to better the planet and conditions for people and animals on it.
If you invest in a fund that research companies for you, it’s essential to understand the different types of ethical investing. That way is because there are slight differences in the approaches. By understanding these differences, you can be confident that the investment decisions and your values are aligned.
Five types of Ethical Investing
1. Ethical Investing (negative screening)
While the term can be used as a catch-all in the media, when financiers talk about ethical investing, they mean negative screening. This is where a fund or investor screens out businesses involved in destructive activities from their investment portfolio (for example, deforestation or genetic engineering).
Fund managers who create ethical investment options will have their specific policies, which will vary between companies. There is no single standard for choosing what meets the criteria of ethical investment. Before committing to a particular fund, ask the company about their investment philosophy and what measures they use to base their decisions.
2. Environmental, Social and Governance (ESG) Investing
This investment area focuses on companies that focus on minimising their environmental impact, social responsibility, and quality of their internal governance practices. Ethical Investing uses negative screening, ESG investing using positive screening to ensure investors’ money supports companies with the highest standards and practices.
Like Ethical Investments, there are no clear criteria to benchmark companies. Fund managers may look at areas like a company’s impact on the environment and the amount of energy wasted in producing their products. They may look at the philanthropic contributions, the diversity of its board members, and whether their suppliers and partners are chosen based on the alignment to their values. They may also look to see how transparent the company is about its activities.
3. Socially Responsible Investing (SRI)
Socially responsible investing is a blend of Ethical and ESG investing. SRI aims to generate positive social outcomes through investment. To choose investments that fall in this class, fund managers first screen out stocks using the ethical investing framework before applying the ESG scoring system to identify companies that demonstrate good environmental, social, and governance policies.
4. Impact Investing
Impact investing is about focusing on the outcome or impact of a company on our planet. This is different from the above types. It may include companies involved in potentially controversial activities, provided those companies can demonstrate they are taking positive steps to adopt a greener, more sustainable approach and lessen their impact on the environment.
5. Sustainable Investing
Sustainable investing utilizes many of the above frameworks to identify the companies to invest in. Sustainable investing uses negative screening, positive screening, and a focus on the output and impact of companies’ operations on the environment. It’s probably the most popular approach with today’s socially conscious investors.
A final thought
Being conscious of how your investments impact the world and actively choosing to take action for positive change will go a long way in accelerating sustainability. Most people working in Australia would have some form of investment through their superannuation fund, and some people will have personal investment portfolios as well. If ethical investing is your new goal, you can start by evaluating the investments you already have.
I hope that this provides an insight into the different approaches to ethical investing. It’s important to remember that the above article is for information only. I am not a financial adviser, and anything I write should not be considered financial or investment advice. Before making any financial decisions, you should consider speaking to a professional and researching options that are specific to your situation.
