What Is Ethical Investing?
Ethical investing is the practice of using one’s ethical principles as the main filter when choosing investments. Rather than relying solely on financial metrics, ethical investors select—or exclude—securities and funds based on values such as environmental stewardship, religious beliefs, human rights, or political convictions. Ethical investing can be highly personalized: two investors with different ethical priorities may end up with very different portfolios even when starting from the same universe of securities (Investopedia).
Key Takeaways
– Ethical investing uses moral or value-based criteria to guide investment choices rather than only financial measures (Investopedia).
– It can be personal and tailored (ethical investing) or follow a shared policy framework (socially conscious investing or SRI).
– Common approaches include negative screens (excluding certain industries), positive screens (favoring companies with desirable practices), ESG integration, shareholder engagement, and impact investing.
– Ethics-based screens do not guarantee superior or inferior investment performance; financial fundamentals and due diligence still matter (Investopedia).
– Historical roots include religious movements (Quakers, Methodists) and more recent emphases on labor rights and environmentalism (NLM; Natural Investments).
Understanding Ethical Investing
Definition and scope
– Ethical investing: selecting investments primarily to align with one’s ethical standards.
– Often overlaps with socially responsible investing (SRI), environmental, social, and governance (ESG) approaches, and faith-based investing—but is distinguished by being more individually tailored when labeled “ethical investing” (Investopedia).
Why investors choose it
– Align capital with personal values (environmental protection, social justice, religious tenets).
– Use ownership and capital allocation to encourage corporate behavior change.
– Reduce exposure to industries an investor considers harmful (e.g., alcohol, gambling, tobacco, firearms — often called “sin stocks”) (Investopedia).
History of Ethical Investing
– 18th century: Religious roots — Quakers prohibited members from involvement in the slave trade; John Wesley (Methodism) urged avoiding investments that harm neighbors (Natural Investments; Discipleship Ministries).
– 20th century: Social movements drove SRI—worker rights, opposition to war, civil rights shaped screens in the 1960s–70s (Investopedia; NLM).
– 1990s onward: Environmental concerns and sustainability became prominent, leading to divestment from fossil fuels and a shift toward clean energy and corporate ESG practices (Investopedia; NLM).
– Faith-based examples: Islamic finance forbids investments in alcohol, gambling, pork, interest-based lending; some mutual funds (e.g., Amana Mutual Funds Trust) explicitly follow such principles (Congressional Research Service; Saturna Capital).
Fast Fact
– An organization’s stated mission or code of ethics is not proof of ethical conduct. Example: Enron published a comprehensive code of ethics yet engaged in widespread fraud and law violations—illustrating the importance of independent verification of corporate behavior (The Citadel).
How to Invest Ethically — Practical Steps
Use this step-by-step guide to define your approach, select investments, and monitor outcomes.
1) Clarify your values and objectives
– Decide which ethical issues matter most (environmental impact, labor practices, religious restrictions, anti-corruption, animal welfare, etc.).
– Choose an investing objective: values alignment only, values + competitive returns, impact with measurable outcomes, or a mixture.
2) Select an approach or combination of approaches
– Negative screening: exclude industries/companies that conflict with your values (e.g., tobacco, weapons, gambling).
– Positive screening: overweight companies with strong ESG practices or clear positive impacts (renewables, fair labor leaders).
– ESG integration: include environmental, social, and governance metrics alongside traditional financial analysis.
– Impact investing: seek measurable social or environmental benefits as part of expected outcomes.
– Shareholder engagement: buy shares to vote, file resolutions, and engage management to influence behavior.
3) Decide whether to invest directly or via pooled vehicles
– Direct stock/bond investing: allows precise alignment but requires more research and active monitoring.
– Mutual funds/ETFs: provide diversification and professional management. Be sure fund guidelines match your ethical criteria—SRI funds often follow a single set of rules, while ethical investing can be more bespoke (Investopedia).
– Faith-based funds (e.g., Amana Mutual Funds Trust): follow specific religious investment principles (Saturna Capital; Congressional Research Service).
4) Build and document specific screens and rules
– Write down what you will exclude (e.g., coal producers, companies with >X% revenue from firearms).
– Define positive metrics (e.g., emissions targets, diversity policies, third-party sustainability certifications).
– Decide acceptable thresholds and whether exceptions can be made.
5) Perform due diligence beyond mission statements
– Review a company’s public filings, sustainability reports, controversies, and third-party research to verify stated policies are practiced (Investopedia).
– Beware of greenwashing—look for measurable targets, audited data, and sustained practices.
– Use multiple information sources and historical behavior (case study: Enron’s gap between words and actions underscores this need) (The Citadel).
6) Use third-party research as a tool—but not the only tool
– Use external ESG ratings and independent research to scale screening and compare companies; but recognize different providers can score the same company differently.
– For funds, review prospectuses and policies to confirm screens and investment processes align with your criteria (Saturna Capital on processes for faith-based funds).
7) Consider diversification and financial fundamentals
– Ethical priorities should be balanced with risk management and financial analysis: review balance sheets, cash flows, competitive position, valuation, and expected returns (Investopedia).
– Ethical exclusion of large sectors can increase concentration risk—manage allocation carefully.
8) Implement with appropriate products
– If you need precision, select individual securities that match your screens.
– For convenience and diversification, choose funds whose mandates match your values. Confirm the fund’s selection criteria and oversight.
– Consider impact funds for measurable outcome reporting.
9) Monitor, engage, and adjust
– Regularly review holdings for changes in corporate behavior or controversies.
– Vote proxies, file or support shareholder resolutions, and engage management where possible.
– Update your written criteria as priorities or available data change.
10) Document and report outcomes
– Keep a written record of your ethical policy and why each investment meets or fails your criteria.
– Track both financial performance and nonfinancial impacts (when measurable).
Practical checklist before you invest
– Have I clearly documented my ethical criteria and priorities?
– Do my chosen investments (stocks/funds) publicly disclose policies that align with my criteria?
– Have I verified these practices with independent sources or sustained evidence?
– Am I comfortable with the potential trade-offs between strict screens and portfolio diversification?
– Have I included a plan for shareholder engagement or divestment if companies fail to meet standards?
Common pitfalls and how to avoid them
– Greenwashing: Avoid funds or companies with vague commitments; demand measurable, audited targets.
– Overconcentration: Excluding whole industries can skew risk—use diversification strategies.
– Relying on mission statements: Always corroborate stated ethics with behavior and independent reporting (Enron example) (The Citadel).
– Assuming better ethics = better returns: Ethical choices are values-driven and do not automatically lead to outperformance (Investopedia).
Examples
– Faith-based investing: Amana Mutual Funds Trust applies Islamic finance principles (no gambling, interest, etc.) in its investment process (Saturna Capital).
– Exclusions: Many ethical investors avoid “sin stocks” such as gambling, alcohol, and firearms companies (Investopedia).
Tools and resources to consider
– Company filings and sustainability reports for primary data.
– Fund prospectuses and investment policy statements to verify fund-level screens (Saturna Capital).
– Independent histories and academic overviews for context on SRI trends (NLM).
– Historical and investigative case studies to learn cautionary lessons (e.g., Enron) (The Citadel).
Concluding thought
Ethical investing lets individuals align capital with values, but it requires disciplined definition of those values, careful due diligence, and ongoing monitoring. Whether motivated by religious beliefs, social causes, or environmental concerns, ethical investors should pair their value-based screens with rigorous financial and operational analysis to build portfolios that reflect both conscience and sound investing practice.
Sources
– Investopedia. “Ethical Investing.” https://www.investopedia.com/terms/e/ethical-investing.asp
– Natural Investments. “Quakers and SRI: Some Historic Perspective.”
– Discipleship Ministries, The United Methodist Church. “‘The Use of Money’ by John Wesley.”
– Congressional Research Service. “Islamic Finance: Overview and Policy Concerns.”
– Saturna Capital. “Halal Investing.”
– Saturna Capital. “Amana Mutual Funds Trust: Equity Investment Process.”
– National Library of Medicine, National Center for Biotechnology Information. “Socially Responsible Investing: From the Ethical Origins to the Sustainable Development Framework of the European Union.”
– The Citadel. “Character and Ethics: The Enron Scandal.”
If you’d like, I can:
– Help you draft a one-page personal ethical investment policy.
– Screen a sample list of funds or stocks against a set of ethics criteria you define.
– Provide a sample portfolio that balances common ethical screens with diversification and risk management. Which would you prefer?