If you’ve read financial news this year, you’ve probably heard of Ethical investing. People are increasingly considering whether they’re morally comfortable with supporting the organizations behind their investments. Often, they make investment choices based on their ethical viewpoints.
Ethical investing is something people with a wide variety of beliefs can, and do, practice. From Environmental, Social and Governance (ESG) investing with firms like BlackRock to the MAGA ETF through Point Bridge Capital, ethical investing opportunities run the gamut of personal and political views.
Ethical investing may be known as socially responsible investing (SRI) or ethical sustainable investing. If you decide you want to consider your personal ethics as part of your investment decision-making process, there are important considerations. First, you must determine whether the investments you’re considering align with your ethics. Then you need to strategize your investments in ways that support your ethical goals while avoiding major risks in the process.
Determining Ethical Matches
Sites like Morningstar are a good starting point for determining whether a given investment fits your personal values. Using information from those sites, you can determine what investments a fund you’re considering has in its portfolio.
If those investments include organizations that operate counter to your morals, you might choose not to use that fund regardless of the financial risk/reward calculation. On the other hand, if you like the values of the fund's investments, that could sway your decision to invest.
However, you should be aware that ethical funds are not set in stone. They can change their portfoliosm which means they might drop investments you want to support or acquire ones you don’t. Plus, the information you use to determine what a fund invests in may not be current at the time you read it.
All this boils down to the idea that even if you heavily research ethical investment vehicles in an attempt to align your choices with your values, it can be difficult to guarantee that 100% of your money will go only to organizations you support.
It’s very important to understand that you can only do so much when attempting to align your investments with your ethics, as it’s virtually impossible to ensure that your investment money will never end up working against your morals.
Don’t Forget Risk
Investing ethically may be a small comfort if it causes you to reduce your standard of living in retirement or postpone retirement altogether. A balanced portfolio is still key; even if there’s a social cause you firmly believe in, it’s an investing mistake to put all your eggs in that one basket.
If that cause proves to be financially untenable, you risk losing too much if your investments are too concentrated around it. You can support that cause with some of your investment dollars while also investing in other areas to balance your risk.
With that approach, it’s entirely possible to find an investment strategy you can ethically get behind, and which also makes good financial sense. It does, however, require particular care to do so. Ordinary investing is complex as it is - adding an ethical layer on top of it makes the situation even more complicated!
Deciding on Your Investment Approach
Depending on your values, you might have to adjust your investment approach. Ethical investments are not that easy to determine and you won’t always find what you’re looking for. For example, you might find that you want to put your money into positive impact investments only.
A fully ethical portfolio is hard to guarantee, but it isn’t impossible to invest in companies and ethical funds that will make you feel proud of supporting causes you wholehearedly endorse.
There are different examples of ethical investments and investment approaches:
1. Positive Screening
Positive screning refers to only investing in positive impact funds that work toward whatever ethical cause you align with. These investment funds can mean actively seeking out companies with strong ESG practices like fair labor practices or environmentally conscious practices.
The first thing you’ll need to do is establish a set of criteria for causes you do support. Then, you can conduct your research into investments finds that meet those criteria. Sustainability reports and other publicly available information can help inform your decisions.
2. Negative Screening
In some cases, you might find it easier for you to focus on removing negative impact investments from your investment portfolio. This means you will no longer support funds or avoid investments that support causes you don’t. It’s more straightforward than positive screening. You are simply removing bad eggs that don’t actively pursue negative criteria like morally dubious practices.
3. Impact Investing
Impact funds don’t just focus on ethical purposes. They put equal importance on the performance of the fund. This is great if you want to look for good returns as much as support your moral values.
This approach to ethical investing usually involves looking for very specific challenges that are being addressed by investment funds like healthcare, renewable energy, poverty alleviation, or even climate change. Ethical investors who choose impact investing are interested in making maximizing financial returns and well as making a positive impact.
4. ESG Integration
When creating a financial analysis, our financial advisors will look at a number of things to determine wherther or not an investment makes sense for you. ESG integration is really about taking ESG factors into consideration when conducting a financial analysis.
ESG integration is a good option if you want to assess an ESG fund’s long-term value and stability. Key ESG factors can include:
- Environmental: carbon emissions, deforestation, renewable energy, water usage
- Social: Data transparency and security, customer satisfaction, global human rights, employee diversity and inclusion
- Governance: Lobbying, internal corporate corruption, political alignment, executive pay
Seek Professional Guidance
Because ethical investing is so complex, it’s a very good idea to get help from a financial advisor. It’s very easy to make a rash decision to invest - or divest - based on your ethical viewpoint, forgetting to think about the impact on your finances. A financial advisor can help you understand the potential financial consequences of your ethically-based investment plan.
They can work with you to balance your portfolio, ensuring you don’t take on too much risk in the name of morality, and explain the financial implications of your ethical goals. Working with a financial advisor can help you find ways to make your morality work with your monetary decisions.
At Asset Preservation Wealth & Tax, we often work with clients who want to support certain causes and companies or don’t want to support others. We see it as our responsibility to help them find ethical investments they can be comfortable with both morally and financially. With the right approach and good professional guidance, you can choose a sound investment strategy that also aligns with your values.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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