What is ethical investing?
Ethical investing is the act of making investment decisions based on one’s ethical standards first and investment performance second. Despite this, however, a prudent ethical investor will not always be outperformed by their peers. Oftentimes, ethical investing comprises the avoiding of certain industries, such as gambling or firearms, whereas in other cases an ethical investor will choose to focus on the track record of individual companies in whatever aspects they feel important, such as their policies towards their workers or their environmental impact.
A history of ethical investing
Socially conscious individuals have been avoiding distasteful investments in some form since time immemorial, but the concept was first fully articulated by John Wesley, one of the founders of Methodism, in the eighteenth century, in his sermon “The Use of Money”.
Up until the late twentieth century, ethical investing was most often driven by religious belief, with forms of ethical investing based on social principles growing in line with the social movements of the twentieth century, such as the Civil Rights movement and the anti-Vietnam War movement in the US. Worker’s rights also became a focal issue for social responsibility during this period.
Since the 90’s, an ever increasing focus for ethical investors has been on firms’ environmental policies and impact, in line again with the growth of social awareness surrounding the issue of global warming.
What to look out for in a firm
Ethical investing is a broad field and no two investors will search for the same qualities in a firm, however there are certain key features that are often cited as important factors.
Environmental responsibility has become one of, if not the most important aspect of a company being considered by ethical investors. As such, many environmentally harmful industries are avoided altogether as ethical investors prefer companies that make efforts to be environmentally responsible, such as Fairphone, which is ranked #1 on Greenpeace’s Guide to Greener Electronics.
Consumer surveys have consistently found that companies which attempt to give back to their communities through charitable donations rank highly when it comes to their reputation among ethical investors but generous spending is not the only way a company can be socially responsible. The video below explains a lot in few words about ethical investing.
Oftentimes, if a firm provides a level of education, secure employment and upholds workers’ rights, or if it provides a safe, high quality product, this can be more important than outward shows of charitableness. However, as the scope of large international companies continues to increase, there has been an increasing focus on what behaviors are tacitly endorsed by firms due to the actions of partner firms at different points of the supply chain.
A prominent example of this is Apple, ranked a promising second on the Guide to Greener Electronics and yet a source of great controversy due to their reliance on the Taiwanese company Foxconn to manufacture a great deal of their electronics. Foxconn has had a highly controversial track record on worker’s rights and several worker suicides have attracted considerable media attention since 2007.
Where can I begin researching firms?
Oftentimes the more socially responsible firms will choose to report their successes themselves. If this is the case, one should always make sure that firms’ reports fall in line with respected reporting frameworks, such as the Global Reporting Initiative, which is an independent international organisation which seeks to help businesses more accurately report their impact on social issues. Another one is the United Nations Guiding Principle on Business and Human Rights, which provides a global standard for preventing businesses from adversely impacting human rights, which has been endorsed by the UN.
Other independent ways to assess companies include EthicalQuote, which is a market index that tracks the reputation of the world’s largest companies on social issues.
For those who wish for their investments to be socially responsible but who do not have the time to research every company themselves, there are several investment funds available which focus on responsible investments, such as Calvert Research and Management.
