Ethical Investing (Definition, Examples) | Top 5 Types of Ethical Investment (2024)

Ethical Investing Definition

Ethical investing is a type of investing process 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 investing considers the investor's personal values, such as social, moral, religious, political, or environmental beliefs, during investment decision processes.
• Politics can influence investors' perceptions of the economy and their investment choices. When their preferred political party is in power, investors tend to have higher confidence and perceive lower risks, leading to increased investments.
• Ethical investing allows investors to align their investment decisions with their ideals, promoting positive impacts on society and the environment. This can discourage investment in industries that do not align with ethical standards.

There are two ways in which ethical investing could be done –

• Positive Impact:Choosing industries/sectors/companies whose values align with that of the investor’s values.
  For example: If the investor is from a particular region, then he/she is more prone to buy products that are suitable to their region and invest in them. People from the Southern States are more prone to investing in farming and farming-related industries.
• Negative Impact: Avoiding industries/sectors/companies whose values directly differ from that of the investor’s values.
  For example: If the investor believes that a particular company’s production process is harming the society and the environment, then the investor would avoid investing in that particular company’s shares.

Types of Ethical Investing with Examples

The different types of ethical investing would be those made on different values such as social, moral, religious, environmental values. Let us discuss each of them in detail –

#1 - Investments Based on Social Values

Societal norms dictate what is acceptable to a particular society and what is not. These are usually embedded in different societies and cultures and are widely accepted within that particular society. Taking into account societal values and what could be beneficial to society as a whole, prior to making investments is one form of ethical investing.

For example, – A co-operative society is the best example of investments based on societal values. Members of a particular society form a co-operative and invest in it. When any member of the society requires funds, the co-operative society advances money to that particular member. In this case, the investment is made by the members of the society, taking into account the well-being of the society as a whole – including all its members.

#2 - Investments based on Moral Values

Typically, this form of investing would come under the ‘negative impact’ category. An investor would not invest in any industry/company that does not align with his/her moral values.

For example, – Investors would not be prone to investing in tobacco/liquor manufacturing companies if the investor has strong feelings that such industries are against their morals.

#3 -Investments based on Religious Values

Every religion has its own practices, beliefs, and culture. What is acceptable to one society may not be acceptable to another. Members of a particular religion/culture would be more inclined to invest in industries/companies that are beneficial to their culture/religion or manufacture products that are acceptable to their culture/religion.

For example, – Investors in the Middle East would be more inclined to invest in Hijab/Abaya manufacturing companies as there is a huge demand for it, and it is acceptable to that particular society. Investors belonging to the Judaism faith would be more inclined to invest in companies that adhere to their norms – such as Kosher foods.

#4 -Investments based on Political Values

The political climate affects the way the investors perceive the state of the economy and naturally influences their investing patterns. Investors tend to invest more and believe the risk to be lower when their political party is in power. Investors are more likely to hold stocks and invest in long term securities during such periods. Alternatively, investors would be less likely to invest when a different political party is in power. They would be more likely to invest in short term stocks and trade more often.

For example – A democrat would be likely to invest more in the stock market when the Democrat Party is in power and would invest in industries that favor the particular party’s value systems.

#5 -Investments based on Environmental Values/Green Investing

Given the current state of the planet, green investing is rapidly gaining importance in recent times. Under this type of investing, investments are made in companies that produce environmentally friendly products, or their manufacturing processes are economy friendly. There have been many instances over the past few decades wherein large-scale industries have caused major air/water pollution. These affect the state of the environment majorly.

Green investing focuses on investing in companies which do not harm the environment through their production processes as well as the final product is environment-friendly. It is not sufficient that the processes are environment-friendly if the final product turns out to be something harmful –such as single-use plastics.

Green investing also focuses on other companies which have an environmental friendly objective such as –

• Conservation of existing natural resources;
• Discovering and producing alternative energy sources;
• Recycling;
• Cleaning up of water bodies;
• Green transportation;
• Reduction of wastage.

Advantages of Ethical Investing

The following are some advantages of ethical investing –

• Ethical investing ensures that investments are made in line with the investor's values.
• With more people choosing to invest ethically, it positively impacts both the society and the environment in such a way that it discourages other industries.
• The returns on these investments are not just monetary but have an overall impact on the investor as well as the planet.

Disadvantages of Ethical Investing

Although ethical investing is theoretically good, it faces the following disadvantages –

• Ethical investing might not fetch the same returns as other industries. The returns on ethical companies/industries tend to be lower than their counterparts, and the time taken to generate any return would also be longer.
• There could be instances wherein companies allege to be eco-friendly, but in reality, that might not be the case.
• Ethical investing is based on every particular investor. What is acceptable to some may not be acceptable to others. The field is highly subjective.

Conclusion

Ethical Investing is a welcome practice in recent times to ensure that companies adhere to social, moral, environmental, and cultural norms. Poor or harmful manufacturing processes have hindered the community as well as the planet for so long that it is time to make a stand. Although it comes with its set of disadvantages, when practiced well and accepted by all, ethical investing would be a sound investing mechanism.

Frequently Asked Questions (FAQs)

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