Ethical investing is becoming more popular than ever. It grew 42% between 2018 and 2020 to be worth over $17 trillion.
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After reading this article, you’ll have a general understanding of ethical investment and its pros and cons to know if it’s the appropriate investment strategy for you. Let’s get started.
What Is Ethical Investing?
Ethical investing is an investment tactic wherein the investor’s ethical ideals (moral, religious, and social) are considered in selecting investments. With the increase of dubious and unlawful investment arrangements, more investors are beginning to demand that the firms in which they invest be socially responsible. This includes respecting their employees, developing healthy products and services, and refraining from unethical business activities.
Four Ethical Investing Micro-Niches
If you think ethical investing is a sub-niche of investing, you are right. However, you can still dissect it into micro-niches. This is one of the best ways to maximize your profits with ethical investing.
Below are the micro-niches or different types of ethical investing:
1. Impact Funds
Impact funds prioritize fund performance equally. As a result, they work hard to implement ethical improvements that will benefit enterprises that supply certain products and services. Impact funds are appropriate for investors who wish to be socially responsible while also earning a high return.
2. Socially Responsible Investing Funds (SRI Funds)
SRI funds steer clear of contentious investments, such as gambling, weapons, cigarettes, alcohol, and oil. The moral character of the investor is accorded vital weight in investment selection in this case.
3. Environmental, Social, and Governance Funds (ESG Funds)
Unlike SRI funds, ESG funds analyze how environmental, social, and governance risks and opportunities can directly influence a company’s performance when making investment decisions. As a result, they may invest in sustainability while achieving the same level of returns as traditional investments.
4. Faith-Based Funds
Faith-based funds only invest in equities that adhere to religious principles and goals and rigidly prohibit you from making investments that do not fall into this category.
Now that you know about the FOUR micro-niches within ethical investing, let’s look at the benefits and the drawbacks of getting involved in this investing strategy.
Benefits of Ethical Investing
- Investing ethically allows investors to feel good about their investments without compromising their financial returns.
- As more individuals participate in ethical funds, the investments have the potential to expand significantly in the future.
- Because ethical investment is becoming more popular, it will drive other firms to enhance their ethical processes to receive capital.
Drawbacks of Ethical Investing
- Because ethical investing is not a passive approach, it necessitates a significant amount of study to verify that it is consistent with the investor’s values and views.
- Ethical investment may not produce optimal returns, so the investor foregoes financial rewards in exchange for investing ethically.
- Because of the effort and time needed to pick the best investment, the costs for ethical investing may be higher.
How Effective Is Ethical Investing?
One of the primary goals of ethical investors is to avoid investing in firms that generate items contrary to the investor’s social, moral, and religious convictions. However, not investing in a terrible firm and boycotting it does not mean that money is not going to the company.
Furthermore, by boycotting a firm, ethical investors restrict the pool of possible owners, which may lower the stock price, making it more appealing to unethical investors in the market to purchase the shares at these reduced rates.
On the other hand, as ethical investing is growing in popularity, there is increased pressure on investment managers and corporations to be more socially and environmentally aware. This is evident in government regulations, an uptick in independent research around ethical investments, and the outcry for a standard ESG scoring.
Although we still can’t assume that ethical investing will help reduce the world’s social and environmental problems, nor do we know if it yields record-breaking returns, it can be a powerful tool if done correctly.
Investors who want to impact society positively choose to invest ethically. Their primary purpose in investing is to fulfill their moral, social, and religious beliefs.
While ethical investing is beneficial, it is expensive because of the extensive study required to discover assets that match the investor’s primary purpose. Furthermore, shunning investments in immoral firms will not prevent them from succeeding since other investors seeking profits will support them.