At college campuses around the country, environmental activists have been pushing their universities to invest ethically by “divesting” from fossil fuels. By divesting, or removing investments from companies using fossil fuels, universities are partaking in a form of ethical investing. These efforts have been successful at several educational institutions, with schools such as Harvard and Boston University announcing they will invest more ethically by divesting their endowments from fossil fuels.
Essentially, investing is “ethical” if you approach it with a specific ethical code in mind. This could be a specific ethical concern, such as environmental sustainability or fair trade practices, but it also could mean supporting companies with an ethics-focused mission.
Investing with ethics in mind is not only good for the general welfare of people and the planet, but it can also put more money in your pocket. Research done by Morningstar, a global financial research agency, compared the returns from both sustainable investment funds and concluded sustainable funds are just as successful and potentially more successful than traditional funds.
There are two main approaches to investing ethically — one allows for more flexibility on exactly what ethical standards you are utilizing and the other adheres to a widely accepted ethical framework.
Approach #1: Build Your Own Portfolio
Let’s say you have a specific ethical goal in mind when investing, such as environmental sustainability. Then, you can build a portfolio of investments centered around this specific focus. To evaluate companies, you can look up their mission statement or core values to see if a focus on the environment is reflected in their mission.
However, it might not always be clear if a company is actually being sustainable or if they just claim to be. Greenwashing is the practice of claiming to be committed to sustainability to gain market share but not actually reflecting this commitment in action. Essentially, many companies “talk the talk” without “walking the walk.” To figure out whether a company is actually committed to sustainability, you can utilize websites like Impaakt, which measures the true impact of companies beyond greenwashing practices. By thinking critically about the true impact of the companies you invest in, you can build a portfolio reflecting your core values and ethical goals.
Approach #2: Invest in an ESG (Environmental, Social and Governance) Fund
If you are looking to invest ethically but don’t want to evaluate companies yourself, you can invest in an ESG fund. ESG is an approach to evaluating companies that considers environmental, social and governance factors.
This might sound complicated, but it essentially boils down to whether or not the company is mindful of their impact on surrounding communities, the environment, their employees and any shareholders in their company. Companies with ethical supply chains, labor policies and low emissions standards are considered for ESG funds. Check out these ESG funds to add to your portfolio today.
By rethinking your approach to investing, you can align your personal ethics with your investing goals. Research suggests financial success and ethics are not mutually exclusive, so get the best of both worlds with these approaches!