The 5 Principles of Ethical Investing

NNatalie October 14, 2023 12:26 PM

Ethical investing, also known as socially responsible or sustainable investing, isn't a new concept. However, it's gained significant traction in recent years as more investors become aware of the impact their money can make. If you're interested in aligning your investment strategy with your personal values, ethical investing might be a great fit. Here are the five principles of ethical investing that can guide you on this journey.

1. Understand ESG Factors

The first step in ethical investing is understanding ESG factors. ESG stands for Environmental, Social, and Governance. These are the three central aspects of a company's operations that ethical investors consider when making investment decisions. The goal is to invest in companies that are not only profitable but also contribute positively to society.

  • Environmental: This includes how a company's operations affect the environment. Are they using sustainable practices? Are they reducing their carbon footprint?

  • Social: This looks at how a company treats its employees, customers, and the communities where it operates. Do they pay fair wages? Are they committed to diversity and inclusion?

  • Governance: This focuses on a company's leadership and corporate policies. Are they transparent about their operations? Do they have ethical business practices?

2. Know the Risks and Returns

Ethical investing comes with its own set of risks and returns. Ethically-run companies may outperform their peers in the long run because they're more likely to have sustainable business practices. However, they might also face challenges that could affect their financial performance. It's essential to understand these risks and potential returns before diving into ethical investing.

3. Diversify Your Portfolio

Just like traditional investing, it's crucial to diversify your portfolio in ethical investing. This means investing in a variety of sectors, geographies, and asset classes to mitigate risk. Here's a table showing some common ethical investment options and their potential risks and returns.

Investment Option Potential Risk Potential Return
Green Bonds Market Risk Low to Moderate
ESG Mutual Funds Market Risk Moderate to High
Sustainable ETFs Market Risk Moderate to High
Impact Investing High Risk High

4. Do Your Research

Don't just rely on ESG ratings. Do your own research to ensure the companies you're investing in align with your values. This might involve reading annual reports, checking third-party assessments, and staying informed about industry trends.

5. Get Professional Advice

If you're new to ethical investing, it might be helpful to seek the advice of a financial advisor who specializes in this area. They can help you understand the nuances of ethical investing and create a strategy that aligns with your financial goals and personal values.

By following these five principles of ethical investing, you can make a positive impact with your money while also potentially earning a healthy return on your investment.

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