Ethical Investing: 3 Easy Ways To Align Your Financial Goals With Your Values - 5 minutes read
Everyone wants to make money, and investing — if you can afford it — is a good way to increase your personal wealth, gain more financial freedom and get closer to getting ahead instead of just getting by. But more and more investors are concerned not just about profits but also about the way in which those profits are being created.
Ethical investing isn’t new, but it’s gaining traction thanks to the growing number of socially and environmentally conscious younger investors. For these younger investors, the “how” is just as important as — or even more important than — the “how much.”
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Keep reading for a look at ethical investing, what it means and three easy ways you can make sure your investments line up with your personal ethos.
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What Is Ethical Investing?It’s obvious that ethical investing, sometimes called socially responsible investing, differs from traditional investing in that investors consider the activities of the companies being invested in. However, a deeper understanding of the term is useful in order to know how the strategies below can be successfully applied.
Ethical investing is based on an investor’s personal values and moral compass, as well as conventional financial concerns. It’s not charity because the end goal is still a profitable return on investment, but it does involve increased scrutiny of the stocks an ethical investor is considering.
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Method 1: ESG CriteriaESG stands for environmental, social and governance, and these are three criteria some ethical investors rely on when evaluating a company’s ethics before investing. Adopting ESG criteria means supporting companies with environmentally responsible, socially equitable and ethically governed practices. Here’s a closer look at what that entails.
Environmental criteria: The amount of carbon emissions a company causes, how it manages any waste created in manufacturing or shipping, its use of water, and its energy-efficiency practices are all environmental concerns.Social criteria: This includes everything from how a company manages relationships with employees and customers to how it chooses suppliers and supports various communities. It can mean diversity and inclusion policies, fair labor practices, human rights programs, and community engagement.Governance criteria: Governance refers to how a company manages its internal affairs, including corporate leadership, executive salaries, audits, oversight, internal controls and the rights of shareholders. For this criteria, you’re looking for a company that’s run in an ethical and transparent manner.Story continues
How To Use ESG CriteriaFor those interested in ethical investing, ESG criteria are among the best ways to choose what companies to support. Many investment funds now highlight their ESG rankings, with tools and platforms, like those from MSCI and Sustainalytics, providing easy-to-read ESG scores that serve as excellent guidance when making decisions about stock purchases.
Method 2: Thematic InvestingAnother approach to ethical investing is thematic, focusing investments around specific trends or “themes” that align well with your personal beliefs while still showing the potential for growth and profit. While many investors use thematic investing to spot emerging trends, ethical investors can use it to find investment opportunities that align with their values.
This style of investing relies less on a specific company’s metrics and is more concerned with broader concepts, like renewable energy, green infrastructure, healthcare innovation, and equality and diversity.
How To Engage In Thematic InvestingSeveral mutual funds and ETFs, or exchange-traded funds, are specifically created to appeal to ethical investors. As with all investing, it requires some due diligence and research.
For ethical thematic investing, the goal is to find funds that align with your goals and preferences. You can find things like an ETF that focuses on sustainable energy or a mutual fund that emphasizes diversity in corporate leadership. Many brokerage websites will list thematic investments by category.
Method 3: Shareholder ActivismOwning stock in a company means you’re granted certain rights as an investor. These can allow you to influence the company’s policies and activities by proposing changes, voting on issues of importance and pushing it to adopt more ethical practices. The focus here is on corporate responsibility, and while it may not be as straightforward as the other two methods, it is in a sense more direct, as it encourages individual participation in determining how a company affects the world in which it operates.
How To Engage In Shareholder ActivismSpecific organizations, like As You Sow and ShareAction, have been created for investors interested in directly advocating for causes. These groups provide platforms fostering collaborative efforts for investors who wish to draw attention to ethical or social issues and tools they can use to effectively encourage change.
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