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Types of ethical investing

  • August 16 2021
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Invest

Types of ethical investing

By Zarah Mae Torrazo
August 16 2021

What are the different types of ethical investing? Here is a look at some different approaches to help you choose.

Types of ethical investing

Types of ethical investing

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  • August 16 2021
  • Share

What are the different types of ethical investing? Here is a look at some different approaches to help you choose.

Types of ethical investing

Since edging its way into the mainstream investment world during the ’70s and ’80s,  ethical investing has gained popularity and evolved over time.

This evolution has created a number of niches and similar terms that all sit under the ethical investing umbrella. 

There are many different types of ethical investing, all with different names, which can make things confusing (and sometimes overwhelming) for investors. 

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The growing popularity of ethical investing also inevitably means more choices for consumers. There is now a vast array of options for those looking to invest responsibly, and a number of different approaches to the screening and selection of “ethical” investments.

To help you on your ethical investment journey, we take a closer look at the different types of ethical investing. 

What is ethical investing?

Ethical investing is a type of investing strategy that takes into account the investor’s personal values (be it social, moral, religious, political, or environmental values) prior to making the investment decisions.

Ethical investors aim to gain financial return while making a positive impact on the world, be it the environment, society or other causes that they support. 

So, what does it mean to invest ethically? Of course, what is “ethical” depends on the person. What is ethical to you may not be to someone else. That’s why it’s important to look behind the curtain of ethical investments and make sure they align with the impact you’d like to see.

Investment products available to investors looking to create an ethical portfolio include stocks, mutual funds, ETFs and bonds.

To learn more about the basics of this investment strategy, watch our video on “What is ethical investing?”.  

What are the different types of ethical investing? 

As we mentioned, there are multiple types of or names for ethical investing. While it has a few different sub-categories, most of these variants trend towards the same idea: creating positive change by thoughtfully and intentionally investing your money.

But how these sub-categories achieve that idea differs. Some only include positive-impact investments, while others simply exclude negative-impact investments. Still others use both inclusionary and exclusionary methods.

Keep in mind that the types we will discuss are often used interchangeably, without much consensus on which are exclusive, which are inclusive and which are both.

With that said, let’s take a closer look into what each one means so you can decide what and if one is right for you.

1. Environmental, social and governance (ESG) investing

Environmental, social and governance investing, also known as ESG investing, aims to maximise financial returns while factoring in three key areas of a company’s environmental, social and governance practices.

This is a shift from the traditional investment research, which usually centres around the financials of a company. 

Ethical fund managers give a company an ESG rating on the three areas mentioned when using this strategy.

Let’s see some examples. On the social side, let’s say a company has a long-term project that aims to give back to their community or enacts racial and gender equality standards. This means that they are practising excellent social practices and would be given a high rating on the social company. 

Concerning the environmental aspect, fund managers will look at how much energy a company wastes or how its operations affect its surrounding environment. When looking at governance practices, things like the ability for shareholders to vote on important issues and the accuracy and transparency of reporting are factored in.  

Several investment platforms, such as Bloomberg, provide ESG ratings on the companies that you might be interested to invest in. 

2. Socially responsible investing (SRI)

While ESG investing focuses on what companies are doing, socially responsible investing mainly focuses on what they aren’t doing.

Socially responsible investing steers clear of investing in firms that profit from or take part in harmful activities. This type of ethical investing assumes that companies should have a responsibility to the world and its customers.

First, ethical fund managers screen out “sin stocks” or companies involved in or associated with an activity that is considered unethical or immoral. These harmful activities can be anything from tobacco sales, firearm sales to low labour standards. This is called negative screening. 

Then, they will apply an ESG scoring system to identify companies that demonstrate good environmental, social and governance policies. This is called positive screening.  

This mix of positive and negative screening aims to capture the best of both worlds and, some say, is a more ethically robust approach.

Additionally, this type of ethical investing typically takes a more targeted approach to investing in companies that align with personal views or beliefs. 

But remember that any fund labeled as “socially responsible” or “ethical” will likely have its own set of standards for eliminating or including companies, so it’s your job to discover what those standards are and if they align with your own.

3. Green investing or sustainable investing 

Green investments, also called sustainable investing, may fall under the umbrella of SRI, but they are fundamentally much more specific.

Often combined with socially responsible investing (SRI), green investments are aligned with a commitment to the promotion of environmentally friendly business practices and the conservation of natural resources.

Activities included under green investing are the conservation of natural resources, the production and discovery of renewable energy  sources, the implementation of clean air and water projects, or other environmentally conscious business practices. 

Because individual beliefs on what constitutes a “green investment” differ, what qualifies as a green investment can greatly vary. Additionally, with the variety of ways a firm or a fund can “go green”, you’ll need to do your research as to what sustainable means to the company or fund in which you plan to invest.

4. Impact investing

Impact investing is just what it sounds like: it involves holding investments in companies that make a positive impact on the world. This can include sustainable companies, socially responsible companies, and companies with high ESG ratings. 

For example, they may choose to invest in an agriculture firm producing genetically modified (GM) foods, provided the firm can demonstrate they are taking positive steps to adopt a greener, more sustainable approach and lessen its impact on the environment.

Common examples of impact investments include non-profits such as education and healthcare companies, and companies making strides in renewable energy and agriculture.

But impact investing is also more than that. It’s investing funds in companies that have a positive impact on your wallet or those that earn you great rewards, too. 

Impact funds are suitable for investors who are socially responsible but also want good returns.

How do I invest ethically? 

Now that you know what the types of ethical investments are, here are the basic steps on how you can invest ethically: 

  • Know what’s ethical to you. Your ethical investment journey starts with you. The first step is to think about what industries you definitely want to avoid or whether there are any particular issues that you want to support. This will help you narrow down the available investment options that align with your values.
  • Do your research. Like any investment, it’s important to do your due diligence before you put your money into something. For example, if you are looking to invest in a company that claims to have ethical practices, double-check if their policies are actually being carried out and have had a significant positive impact. 
  • Have a hands-on approach. Investing according to personal ethics is, well, personal. Hence, you want to be the one in charge of picking what you put your money into. While investing on your own can require quite a bit of time and research, it can be done. There are also resources to help you discover companies with practices that align with your ethics. You can also talk to your financial adviser or broker to help you achieve your vision of an ethical portfolio.
Types of ethical investing
Types of ethical investing
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