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The Rise of Ethical Investing

July 26, 2024

Read Time: 5 minutes
Author: Inovayt

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Ethical investing has become increasingly popular over the past few years. For those looking to invest, it’s a way to ensure their money is going towards businesses striving to create positive change for the world.  If you’re looking to start or build upon your investment portfolio, read on for why ethical investing might work for you. 

What is ethical investing? 

Put simply, ethical investing is about investing in companies that align with your values and ethics. Ethical investing can be divided into four main categories: ESG investing, SRI investing, impact investing, and faith-based investing. When choosing your investments, you can select a combination based on financial returns and your criteria. This often looks like avoiding companies that cause harm to society or aren’t making a positive impact. 

ESG investing 

The first type of ethical investing mentioned is ESG investing. ESG stands for Environmental, Social and Governance. It can be broken down as follows: Environmental: This aspect of ESG investing looks at a company's impact on the environment. It can also include a company’s carbon footprint and how environmentally friendly its manufacturing processes are.  Social: The social aspect of ESG investing concerns how a company works to improve its social impact within the company and the broader community. This includes diversity and inclusion programs and how a company advocates for social good in the world. Governance: Lastly, governance refers to how the company’s board and management team drive positive change. It involves things like pay equality and diversity in leadership teams. 

SRI funds

SRI investment funds differ slightly from ESG funds, with SRI standing for Socially Responsible Investing. These funds avoid investing in certain companies entirely. Often, these companies are in the gambling, tobacco, alcohol, firearms, and oil industries.  While they share similarities, ESG funds are about being proactive in choosing the companies you want to invest in, whereas SRI funds are about choosing the industries you want to avoid.

Impact funds 

Impact funds combine social and environmental benefits with financial return. This type of investing is great for people who select companies based on their performance in those areas and the growth they deliver. 

Faith-based funds

As the name suggests, faith-based investors only invest in companies that follow their religious values and exclude companies that don’t match their belief system.

The benefits of ethical investing

As is evident in the significant increase in ethical investing, there are some great benefits associated with it.

Positive impact

One of the reasons many people choose to start making ethical investments is the potential to effect positive change. Ethical investing allows investors to support companies and initiatives that promote things like sustainability, social justice and corporate transparency. It can also lead to real-world improvements in environmental health, labour conditions and corporate governance. 

Risk management

Companies with strong ESG practices often exhibit lower risk profiles. Poor environmental practices can lead to costly clean-ups and litigation, while poor governance can result in financial scandals and loss of investor trust. Ethical companies are generally more resilient to such risks, providing a safer long-term investment.

Financial performance

Although there is a belief that ethical investing requires sacrificing returns, companies with strong ESG practices often perform as well as, if not better than, their non-ESG counterparts. This can be attributed to better risk management, operational efficiencies, and strong stakeholder relationships.

Value alignment

Ethical investing allows investors to put their money where their values are. For many, this alignment between personal beliefs and financial actions provides a sense of purpose and fulfilment that traditional investing may lack.

The challenges of ethical investing

As with any financial decision, there are some challenges to ethical investment.

Defining ethical criteria

One of the significant challenges in ethical investing is the subjective nature of what classifies as ethical behaviour. Investors often have different values, and what’s ethical to one person might not be to another. This diversity requires a broad and flexible approach when defining investment criteria.

Data and transparency

Data and transparency quality can differ significantly between companies and regions. While there has been progress in ESG reporting standards, discrepancies and gaps remain, making it difficult for investors to compare and evaluate companies accurately. 

Greenwashing

As ethical investing gains popularity, some companies might engage in greenwashing. Greenwashing (in this context) refers to companies exaggerating or misrepresenting their ESG efforts to attract ethical investors. This deceptiveness can mislead investors and dilute the impact of genuine ethical investments. 

Performance pressure

Ethical funds are often under intense scrutiny to perform financially while maintaining their ethical standards. Balancing these objectives can be challenging, especially in volatile markets or industries where ethical options are limited.

Tips getting started

Looking to get started with ethical investing? Here are our top tips. 

Solidify your values

Clearly outline what ethical investing means to you. Identify the social, environmental, and governance issues that matter most to you and use these criteria to guide your investment decisions.

Conduct your own research

Investigate the ESG practices of companies and funds you’re considering. Keep an eye out for third-party ESG ratings and reports and use that criteria to guide you. 

Diversify your portfolio

As with any investment strategy, diversification is key. Spread your investments across different sectors and asset classes to manage risk effectively.

Chat with the staff at Inovayt

Having a professional on your side means you can set up an effective investing strategy that’s tailored to your goals and considers the risks involved. 

How can the team at Inovayt support me? 

Ethical investing is a powerful way to align your personal and financial goals. By supporting companies prioritising sustainability, social responsibility, and good governance, investors can contribute to a more equitable and sustainable world while achieving competitive financial returns. At Inovayt, our team of financial advisors have extensive experience in ethical investing and helping you achieve your financial goals. If you’d like to chat more about ethical investing with a team member, get in touch today. 

Need investment support? Chat with an expert today

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