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What is ethical investing?

Ethical investing means selecting your investments based on a certain set of moral or ethical principles.  Typically, it is about putting money into investments that are sustainable in terms the environment, social impact, and good governance – as well as profit.

Ethical investing involves decisions on what to exclude, and what to include in your portfolio.

What’s out?

Usually, ethical investments will try to avoid putting money into activities that are considered harmful.  This is called negative screening.

Common exclusions from ethical funds are what are sometimes called ‘sin stocks’ such as tobacco, gambling, and firearms.

But exclusions can go further, for example, avoiding animal testing or genetic engineering, or companies that make money from ‘sin-stock’ activities – for example, hotels which run casinos.

Ethical investing can also be based on a particular moral or religious code.  For example, Shariah-compliant investments take an approach based on Islamic law, and typically exclude bonds, companies with excessive debt, and alcohol.

What’s in?

The other side of ethical investing is seeking to include investments that actively produce an ethical benefit.  This is called positive screening, or impact investing.

A typical example of impact investing is clean energy or solar power projects, which aim to provide low-carbon intensity energy.

 

Read on: ESG, SRI, and impact investing: what’s the difference?