min read
· Posted on
February 21, 2024

What is ethical investing?

What actually is ethical investing and does it really generate returns? You bet ya! Learn how ethical investing works in under 3 minutes.

What's the key learning?

  • Ethical investing is about aligning your investments with your values and morals
  • Negative screening is a process of seeking out investments that 'do no harm'.
  • Positive screening is a process of seeking out investments that 'do good'.
  • Ethical investing provides both financial and societal returns, but as a new discipline it lacks standardisation.

This article is part one of a three-part series on ethical investing. 

You might have heard the phrase, ‘put your money where your mouth is’ before.

In case you haven't, here is the phrase.

It’s a way of saying that your behaviours should align with your values and the things you care about most. 

And that includes your financial behaviours. 

Ethical investing is all about sending your dollars on a mission to do good in the world (or at least just not doing bad)... while still making a financial return.

It’s a pretty broad term, and you’ve probably seen it used interchangeably with other terms like ESG, impact, social responsibility etc. 

While they all fall under the umbrella of ‘ethical investing’, they mean slightly different things. 

So let’s take a look at one of the simplest ways to ethically invest. It’s called “screening”. 

Negative Screening: 

Negative screening essentially is a practice of seeking out investments that “do no harm”.

With negative screening you’re looking to filter out investments that are seen to harm society or the environment from your portfolio… and don’t align with your values

For example, you might choose to avoid investing in mining companies if you value reducing reliance on fossil fuels.

Or you might choose not to invest in a company because they don’t meet diversity standards that you stand by.

Positive Screening: 

Positive screening is a level up from negative screening. 

It’s sometimes called the ‘best-in-class screening’. With positive screening, you actively choose industries or companies that align with your values.

You and your positively screened investments with matching values

With positive screening, you as an investor can narrow down potential investments that support causes that you consider to be impactful.

While negative screening looks for investments that “do no harm”, positive screening seeks out investments that “do good”.

An example of positive screening to invest would be to invest in companies that generate at least 75% of their total revenue as ‘clean revenue’. 

Clean revenue is revenue from goods and services that have a clear environmental benefit.

Or it might be choosing to invest in the solar energy industry if you believe a particular investment is creating a positive impact in the transition to renewable energy.

What are the benefits of ethical investing?

As ethical investing grows in popularity, more investors are becoming aware of its benefits.

  1. You get to invest in a way that aligns with your values - making money (hopefully) AND feeling good doing it? Sign me up pls!
  1. You could reduce the risk of your investment portfolio - more companies are recognising that taking an ethical approach to business is necessary for their long-term survival.
  1. Cash money baby! Morgan Stanley’s research found that responsible investment funds have similar returns and lower downside risk than regular investments - especially in volatile market conditions.

Okay I got it. So what are the challenges with ethical investing?

Because ethical investing is so new, it’s still raw, and there are some challenges involved.

  1. Not all ethical investments are necessarily good investments - it’s important to consider the commercial reality and viability of an investment before you put your money on the line.
  1. There’s a lack of standardisation in the realm of ethical investing - because it’s a new way of investing, definitions and ways of measuring impact are still murky and vague. That can make it tough to analyse investments
Trying to understand all the impact buzzwords in company reports like

Imagine trying to pitch a tent for the first time with no instructions…you can’t know for sure that you’re doing it right.

So despite the challenges of ethical investing, it is growing and growing in popularity and reshaping the way investors look at the concept of ‘return’.

This article is part two of a three-part series on ethical investing. Stay tuned for part two on Types of Ethical Investing.

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