Ethical investing has been gaining prominence over the last few decades. Find out what makes it an attractive investment strategy in this post.
Ethical Investing: Types, Pros and Cons
The investment technique known as ethical investing prioritises the investor’s moral, religious and social ideals over financial gain. The reason for this is that a growing number of investors have begun to demand social responsibility from the companies they invest in, primarily because of the rise in dubious and unlawful investment arrangements.
Ethical investing entails fair labour practices, the production of healthy and beneficial goods and services, and abstaining from unethical business activities.
Investors who want to utilise their money to support good causes should consider ethical investment. Those who are interested in this type of venture have several options to choose from.
Types of Ethical Investments
Below is a list of the different types of ethical investments:
1. Environmental, Social and Governance Funds (ESG Funds)
ESG investment strategies target shares in businesses that follow good corporate, social and environmental practices. ESG funds take into account the potential effects that environmental, social and governance factors may have on a company’s performance when making investment decisions.
2. Faith-Based Funds
Faith-based funds (aka morally or biblically responsible, or faith-driven funds) only own stocks that uphold certain religious principles and values. This family of mutual funds rigorously avoids investments that do not match that category. They wouldn’t invest in companies involved with alcohol, anti-family entertainment, gambling, tobacco and similar potentially offensive practices.
3. Impact Funds
Impact investing is a term used to describe an investment approach where ethical improvements or positive results for the community and environment take precedence over fund performance or financial returns. Examples of this include investing in non-profits or businesses producing or using clean technology.
4. Socially Responsible Investing Funds (SRI Funds)
Socially responsible investing entails eschewing investments in contentious industries or companies that manufacture or provide addictive substances or activities or whose products or services go against the principles of social justice, sustainability and clean technology. This is why SRI funds steer clear of businesses involved in gambling, guns and ammunition, tobacco, alcohol and oil.
Pros and Cons of Ethical Investing
Whether you want to start ethical investing in Australia or elsewhere, it’s important to be aware of its pros and cons, so you know exactly what to expect.
- When an ethical holding company performs well, the investor benefits financially and emotionally as the business shares their ideals.
- Investments in ethical funds have a great potential to increase dramatically as more people become aware of them.
- The growing relevance and popularity of ethical investing will motivate other companies to raise the bar on their ethical standards in order to attract investors.
- It takes a lot of investigation or due diligence to verify that investing in a business is in line with the investor’s values and views because it is not a passive strategy.
- Since ethical investment may not offer the best returns, the investor may need to forgo financial benefits in favour of upholding their ethical philosophy.
- More work and research goes into finding the right investment, so the costs for ethical investing can be higher compared to conventional investments.
That being said, the number of investors who want to make a positive impact on the society and environment is expected to continue growing.
If this article has inspired you to think about your own unique situation and, more importantly, what you and your family are going through right now, please contact your advice professional.