Ethical Investing

What is ethical investing?

Investing in an ethical manner involves choosing companies to invest in that resonate with your personal morals. This means selecting investments that align with your views and rejecting those that do not. While financial gains are typically a goal of any investment strategy, ethical investing considers the companies themselves, as well as their potential performance.

Due to the ideals behind this type of investing, 'sin stocks' are typically not part of an ethical investment portfolio. This means that companies operating in certain industries are unlikely to feature in a basket of ethical stock investments. Sin stock companies might include those involved in producing or selling:

Alcohol
Tobacco
Gambling
Weapons
Cannabis
Adult entertainment

While not technically sin stocks, businesses involved in fossil fuels such as oil and gas companies, or those that rely heavily on this type of energy, can be included.

Ethical investing is also sometimes used as a 'catch-all' term that encompasses impact investing and Environmental, Social and Governance (ESG) investing. That is, typically, any type of investment method that focuses on companies that have a positive impact on society. This could relate to sustainable environmental practices, or positive corporate impacts like fair pay and human rights responsibilities.

Choosing ethical investments can help to support companies with positive business practices. Ethical investing takes a proactive and purposeful approach that aims to identify companies that align with your ethics. For this reason, ethical investing can be a more personalised strategy to growing your wealth, as your morals will likely differ from another investor.

What are the different ways to invest ethically?

Ethical investments can cover a variety of asset classes but typically feature:

Equities

Bonds

Government bonds

Mutual funds and investment trusts

Index tracking funds

Ethical investing strategies

There are a variety of ways to select ethical investments:

Positive screening: You can choose companies that contribute to positive outcomes and promote ethical goals that align with your own.
Negative screening: You might wish to exclude businesses which fail to produce a positive impact on society or the environment.
Investing thematically: Another strategy is to select your investments based on a certain theme such as sustainability, equality or working standards.

Examples of ethical investing

Because ethical investing lends itself to a more personalised strategy than other types of investing, the industries and companies that are considered ethical options can differ based on individual opinions. While sin stocks are generally left out of the equation, depending on your ethics, you might actively choose to invest in companies that (for example):

Are against animal testing
Promote workers' rights
Prioritise fair labour
Promote diversity
Minimise their carbon footprint
Invest in community projects
Source sustainable materials
Provide socially or environmentally beneficial products and services.

An investment manager can help you create a personalised ethical investment portfolio that aligns with your ethics as well as your financial goals. Whether you want to focus your ethical investments on sustainable companies, businesses that prioritise making a positive impact or for example, those who promote fair trade, enlisting an expert can help you achieve your goals.

Which industries are considered ethical?

There isn't a particular industry that can be classed as ethical as it depends on your personal opinions of what constitutes ethical. While some industries predominantly include sin stock companies and can be classed as 'unethical', there are others whose business practices might lend themselves to ethical investing.

Energy

Healthcare

Education

Fair trade

Companies promoting fair trade include chocolate, coffee and fashion businesses. These companies place great emphasis on fair pay, good working conditions and equality. They often aim to make a positive change through recognising workers' rights and using sustainable materials. The Fairtrade Foundation is an example of an international movement that strives to support sustainable livelihoods for producers.

Logistics

What are the differences between ethical investing, impact investing and ESG investing?

While these ways of investing encompass ethical and moral goals, their focus differs somewhat.

Environmental, social and governance (ESG) investing involves considerations across all three areas. This might include factors such as carbon emissions and energy management, social aspects such as human rights and diversity, and top-level business policies. This method of investing also considers traditional financial metrics to reduce overall investment risk.
Green investing is another approach that focuses solely on the environmental factors of a business' operations.
Impact investing places great emphasis on the environmental and social benefits. Impact investing aims to generate positive and measurable social or environmental benefits alongside the financial returns.
Ethical investing, on the other hand, focuses more on choosing a portfolio with businesses that align with certain moral and ethical viewpoints and can be thought of as a more personal approach.

All four seek to balance financial returns with positive and ethical business outcomes to different degrees.

What are the benefits and considerations of ethical investing?

As with any type of investment, there are a range of benefits and challenges to consider before choosing an ethical investment portfolio.

Benefits of ethical investments

Personalised portfolio

Because ethical investing involves seeking out companies whose values align with your morals, your investment portfolio is personalised to you. As individual values can differ enormously, it’s important to seek an investment manager who can help you achieve your specific ethical and financial goals.

Reduced reputational risk

With a likelihood of an enhanced reputation through good corporate governance, investments in ethical companies could be sound long-term investments. But it's still important to consider that the value of investments can go down as well as up and you could get back less than your original investment.

Contribution to positive change

By investing in ethical companies, you could be helping to contribute towards positive societal change.

Challenges of investing in ethical companies

Subjectivity

Investment restrictions

Lack of frameworks

A major challenge of ethical investing is the lack of legal frameworks around which a company operates. While ESG reporting is becoming commonplace among company communications, disclosures relating to many ethical issues are not yet required. This means that it's typically left to individual businesses to decide on, monitor and report their ethical practices. As well as the risk of false reporting or misleading investors (known as 'greenwashing' in terms of environmental factors), this can make it difficult to gain accurate, up to date information.

"The challenge of ethical investing is compounded by the voluntary nature of many disclosures, which can open the door to greenwashing. Investors need to be vigilant, seeking out an investment manager who is committed to authenticity and has the expertise to discern true sustainable practices from mere claims."

Kai Johns, senior ethical, sustainable and impact researcher at Greenbank

Making ethical investments requires a multi-step approach:

Understand your goals and ethical priorities

Before selecting your investments, you should take the time to define what your ethical goals are. Decide on the issues that resonate with you the most and that align with your beliefs. You'll also need to identify your goals, whether that's long-term growth or maximum financial impact.

Carry out thorough research

As well as researching the various ethical investment options such as environmental, social and impact investing, it's important to consider the ways in which you want to invest. You could look into specific company reports, ethics and goals to ensure they align with your ethical expectations, as well as their financial information.

Consider diversification

As with all investment portfolios, it's wise to maintain diversification to minimise risk and ensure that you have a good balance between ethical priorities and financial goals.

Monitor your investments

You would also need to regularly review the ethical impacts of your chosen investments alongside financial results. Read company reports to remain up to date with performance and adjust your investments if needed.

Get help from an ethical investment manager

If you're unsure about how to manage your investments, it can be a good idea to consult a professional investment manager who can help you create a strategy and portfolio that balances your values and financial aims.

Access professional ethical investment help from Greenbank

At Greenbank, we use our expertise to develop a personalised investment portfolio that aligns with your goals. By getting to know you, your financial aims and the issues that matter to you, we aim to help you use your money as a force for good.

With Greenbank, you'll benefit from:

A personalised portfolio: We use our experience and expertise to create a portfolio of investments that meet a minimum sustainability threshold, which is linked to our framework of eight sustainable development themes.
Regular updates: We understand the importance of staying informed about your investments. That's why we provide regular, up to date reports and give you secure, 24/7 online access to your portfolio.
Access to an award-winning team: Our team has won awards across various categories including the Investment Week Sustainable Investment Awards and the Investment Week Women in Investment Awards.
A responsible investment community: We partner with a range of responsible companies across the UK and are committed to becoming a net zero emissions business by 2040. Our engagement action plan highlights our ongoing focus and our dedication to provide value for our clients.
A dedicated Ethical, Sustainable and Impact (ESI) research team: Our research team has over 20 years' experience of detailed research and investment analysis.