Definition of Ethical Investing
Ethical investing is the practice in which the investment decision of the individual depends on his ethical belief. The individual takes into account his moral beliefs and values before investing in any security or company.
In ethical investing, individuals try to invest in the company or security, which aligns with his belief. Ethical investing does not guarantee an increase in value for investors. For an investor, ethical investing can be done in two ways: First, investors will choose only some set of companies based on their beliefs/values. The reason can be religious, social, etc. For example, in India, many Indians choose to buy products from Patanjali company because Patanjali sells in the name of organic country made products. In another way, an investor tends to avoid some companies because his belief is not matching with companies’ products. For example, some investors avoid the shares of alcohol or cigarette companies because these products are not good for health and also affect societal values.
Examples of Ethical Investing
Below can be examples of ethical investing:
- An investor’s ethical belief is that alcohol is bad for health and also destroys societal values. So he has chosen to ignore the shares of top alcohol companies even though these companies are giving a good return.
- A person from a particular religion may invest in the shares of the companies where the founder or major shareholder is of the same religion.
- Many investors have chosen to not buy the shares of companies where it has been found that child labor was promoted in their factories.
- A company is promoting solar energy. An investor who thinks that promoting solar energy will reduce the population will try to invest in the company.
Best Ethical Investments
Below can be the best ethical investments:
- Investments keeping in mind the social value of a company can be one of the best ethical investments. For example, let’s say a group of companies has opened a pension fund for the employees. So keeping in mind the beneficial value of these companies, members of society are investing in these companies.
- Investors may tend to ignore the companies which do not align with their moral values. For example, many investors tend to ignore the shares of many alcohol companies because of their moral values.
- Investments can also be based upon religious values. A person from a particular religion can be inclined to have the founder or major shareholder of the same religion.
- Ethical investment can also be based upon environmental values. Many companies work on the motto to save the environment or to grow more trees. An investor who wants to work on saving the environment but might not be able to because of many reasons can invest in these companies.
- Many investors are very much attached to certain political values. They believe that if their political party will be in power, then the economy and environment will be in much better shape. So they invest in these political parties.
Advantages of Ethical Investing
Some of the advantages are given below:
- This can help in the growth of companies that work on ethics and moral values.
- Though for a particular investor, ethical investing doesn’t result in better monetary values, but for a society, in the long term, it can create an overall positive impact.
- Ethical investing is good for an investor’s peace of mind since the investment is made in line with his moral values.
- Ethical investing will encourage the companies to work on the societal cause because companies can bank upon these shareholders for growth.
- It encourages other investors also to invest in as per their moral values.
Disadvantages of Ethical Investing
Some of the disadvantages are given below:
- One of the main disadvantages is that it might not give similar returns as compared to other companies. These companies take a longer time to generate a return on investment.
- Companies may misuse the moral values and beliefs of investors and preach wrong propaganda, but in actual their work may be the opposite.
- There also are cases where an investment is ethical for a set of investors but not acceptable for another set of investors. For example, ethical investing based on religion.
The trend of ethical investing is increasing in recent times. Harmful practices of companies have affected the community and environment for a long time, and there is a need to change these practices, and ethical investing can be one of the ways. If ethical investing is practiced well, then it can provide a solid positive impact upon society.
This is a guide to Ethical Investing. Here we also discuss the definition and best ethical investments along with advantages and disadvantages. You may also have a look at the following articles to learn more –