There’s a common belief that a socially or environmentally ethical investment will never be as profitable as other investments. Find out how you can invest in line with your ethics and still make money.
Can an ethical investment be a moneymaker? That’s a question we get from many of our readers. But to answer that question, we have to back up.
Every time we spend money, either through investing or buying new clothes, we make a choice based in part on our ethics. We are using our money to tell a company that we approve of what they’re doing. In a general sense, when you buy a new pair of jeans from a company, you’re telling them that you approve of their business practices. Similarly, when you invest in solar power, you’re telling that company that you care about the environmental benefits of clean energy, and you’re willing to back that with your money.
But what, exactly, is an ethical investment? Although “ethics” is a somewhat subjective term, for most investors, investing ethically means putting money into companies that keep an eye on the social and environmental impact they have on the world.
The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you majored in finance or are a stock broker yourself, you may not feel confident enough to start investing on your own.
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Where to find ethical investment opportunities
Investors who take an ethical investment approach (also known as Impact, Sustainable, or Socially Responsible Investing) invest in companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.
There’s no hard and fast rule for what is or is not an ethical investment. Many of these ethical or “socially responsible” funds and investments avoid nuclear power companies, while others avoid environmentally unfriendly companies, presumably including most other kinds of power generators. There are hundreds of other ethical criteria to consider in your investments: employee well-being, animal cruelty or testing, tax evasion, outsourcing, making fattening food, and doing business in countries with poor human rights or corrupt governments, to name a few.
Responsible investing doesn’t stop there, though. Beyond what a company does or does not do, some investors are looking for stocks in companies that are actively doing good. And that makes a lot of sense.
For example, companies that treat their employees well and make a priority of addressing employee issues are not only less likely to face damaging lawsuits; they should also benefit from more productive employees day-to-day. That’s good for the bottom line and for investors.
Where can you find these investments? Here at Cabot, we’re big believers in investing in individual stocks on your own (rather than through a broker). There are several reasons for this, including giving you more control over your finances and allowing you to enjoy significant gains. But it’s helpful in looking for an ethical investment, as well. You can really dig into a company and learn about their business practices, their gender equality, hiring practices, and so on.
Alternatively, you can invest in socially responsible ETFs or mutual funds. This approach makes it easy to diversify your investments within any category, and they are a great way to begin your socially responsible investing.
But can you make money?
You’ve probably heard that returns from these types of investments are just so-so. But, as it turns out, that’s not true. In one of Morningstar’s sustainable investing reports, results indicated “that 63% of sustainable funds finished […] in the top half of their respective categories (including 35% in the top quartile), helping lift 58% of funds into the top half over the trailing five years. Of note, sustainable equity funds outperformed conventional peers in negative market conditions.”
Solar stocks are another example of a growing market. In the U.S., residential solar installations are climbing, and there’s currently enough to power 13.5 million homes. And that growth should continue, with solar capacity forecast to more than double over the next five years.
Internationally, the northern European countries are ahead on a Watt per capita basis, but China already has the greatest installed solar capacity, with more than 200 GW installed and more than 50 GW installed in 2019 alone.
Before you jump into any investment, though, always take a minute to carefully evaluate each company or fund you’re considering. Do your homework and make smart investments that fit your investing style. It’s absolutely possible to invest ethically and make money. Just make sure you’re not skipping the critical steps that any investor should take before committing to an investment.
What is your opinion on ethical investing? Do you think it’s possible to enjoy a great return and invest in ethical companies?