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What are ethical investments?

Ethical investments are investments made with a view to the personal ethics, morals and social values of investors. It means investments made specifically in companies that are socially responsible, make healthy and legal products and stay away from unethical practices. For example, investors whose core values are that alcohol and tobacco are unhealthy, will not invest in companies that make or market alcohol and tobacco-related products. 

The primary purpose of ethical investing is to support businesses that make a positive impact. The secondary purpose, of course, is to generate good returns on the investment. The process of ethical investing focuses on social, environmental, and governance factors while investing, along with generating profits for investors.

Types of ethical investments

Ethical investments vary with the different values they’re based on. Some ethical investments are driven by social values, while others are made based on religious, political, or environmental values.

  • Ethical investing driven by moral values: This category of ethical investing is driven by the moral values of investors. They invest in companies that support the same values as the investor, generally avoiding companies involved in tobacco, alcohol, firearms, etc. The other alternative for ethical investors is to invest in socially responsible investing (SRI) funds that invest only in socially-responsible businesses and avoid investments in businesses related to firearms, alcohol, and tobacco.
  • Investments driven by religious values: Some ethical investors invest in faith-based funds. It allows them to invest in companies that align with their religious beliefs. You can’t buy stock in a church, but religious investing will generally avoid stocks on alcohol, tobacco or gambling, for example, and support those that champion human rights. There are, of course, key differences between investing among the major religions that we haven’t space to fully unpack here. 
  • Investments driven by environmental values: In addition to moral, social, and religious ethics, many ethical investors opt for green investing. They prefer investments in companies using environmentally friendly products and processes that do not harm the environment. Thus, not investing in companies making single-use plastics is a part of ethical investing based on environmental values. Green investing also focuses on recycling, climate control, water usage reduction, conservation of natural resources and producing alternative energy sources.

Why is ethical investing important?

Ethical investing is beneficial for both investors and society at large. For investors, it can mean greater satisfaction when they invest in businesses that they support. Investors can benefit both financially and emotionally by investing in companies they share core values with. Investing, fundamentally, plays a critical role in society, while generating returns in the process. Thus, ethical investing can be a win-win situation for both investors and the world as a whole.

The growth in ethical investing promotes more and more companies that follow ethical business practices. Good practices are encouraged, and bad practices are discouraged. As a result, ethical investing can help support the long-term wellbeing of the environment, among other ethical concerns.

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Does ethical investing work?

Ethical investing can be great for the emotional and personal satisfaction of investors. It can be reassuring to avoid funding companies that are involved in malicious and harmful practices. However, not investing in unethical companies does not eliminate them – these companies are still able to raise capital from other investors looking for high returns. 

In terms of generating returns, ethical investment funds have generally performed well, matching traditional investments in many cases. In fact, in 2019, many sustainable and ethical investing funds performed better than their traditional counterparts. During the Covid-19 pandemic, when the world’s attention was placed even more on sustainability and ethics, ethical investing funds again performed well when compared to their conventional counterparts.

However, it’s important to understand the various challenges associated with ethical investing. The creation and management of ethical investment portfolios involve a lot of research to ensure that the investments align with the values of the investors. Therefore, they can come with high fees. Additionally, ethical investors may need to sacrifice their returns at times to comply with their ethics and values.

Best ethical investment funds in 2021

A large number of funds support ethical investing. A new family of funds, called impact investing funds or ESG funds, have cropped up in the investment world and form a considerable part of modern-day investment portfolios. Some picks for the best ethical investment funds for 2021, based on the returns generated, are as follows:

  • Baillie Gifford Positive Change Fund: The fund invests in companies of any size, sector, or country; however, the investment is limited to companies creating a positive impact. Its holdings include Tesla, Moderna, Illumina, and other companies addressing issues related to healthcare, education, and the environment. The fund reported a growth of 80% over the past year.
  • Baillie Gifford Global Stewardship Fund: This ethical investment fund invests in companies that are dedicated to social issues, environmental challenges, and corporate culture. The companies in Global Stewardship fund behave in the best interests of all their stakeholders. The fund reported a growth of 71% over one year.
  • FP Carmignac Emerging Markets Fund: The fund excludes controversial sectors and invests only in companies satisfying the ESG criteria. It reported annual growth of 63%.

Overall, ethical investing is, in many ways, an ideal form of investing for the future. It can generate excellent returns for investors, all while allowing them to support their moral, social, religious, and environmental values.

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