Ethical Investing Defined
Ethical investing allows you to choose the companies and funds that you invest in based on how they match your values.
For example, if you are looking to invest in a cosmetics company and you highly regard animal rights, you would look for a company that does not test their products on animals.
The focus on and inclusion of ethical investment options has been trending up for a number of years. There are more and more people who want to do good with their investment dollars.
Ethical Investment Options
There are many types of ethical investment options to choose from. Some of those include:
- Mutual Funds – these allow you to put your money together with that of other investors to purchase a group of stocks, bonds, or securities;
- Exchange-Traded Funds (ETF) – a group of securities that trade on the exchange like a stock;
- Impact Investing – this type gives equal weight to social and environmental impact and fund performance;
- Sustainability Investing – focuses on companies that work to solve sustainability problems, such as climate change, renewable energy, and resource conservation;
- Moral Investing – strives to avoid companies that support gambling, use animal testing, or exploit their workers. This can be found in socially responsible investing funds (SRI Funds);
- Faith-based Investing – this aims to match your religious values and principles to those of the companies you are investing in;
- Environmental, Social, and Governance (ESG) Funds – these funds focus on the environmental, social, and governance aspects of companies.
ESG And Ethical Investing
In this section, we are going to break down the three parts of ESG Funds.
Environmental
This angle considers how a company treats the environment. It takes into consideration their carbon footprint, what “green” efforts they are making, and how they handle their waste disposal.
An example of this is Patagonia, a manufacturer of outdoor apparel. They have been focused on being kind to the environment since 1985. They donate one percent of their sales to environmental preservation and restoration and work to keep their greenhouse emissions low.
Social
The social aspect focuses on how a company deals with its employees, its suppliers, and its community. Specifically, things like paying attention to human rights issues and labor practices.
In an effort to improve the health of their communities, CVS chose to stop selling cigarettes in 2014. Since then, they have also established a $50 million campaign to assist in ending teen vaping.
Governance
Governance scrutinizes how a company is run, from the diversity of its board and how the executives get compensated, to shareholders’ rights and business ethics.
The CEO and co-founder of The Muse, Katheryn Minshew, stood up for her junior employees. After obtaining a large contract, she found the company talking down to her employees. After addressing this behavior with the company, they kept doing it, so she terminated their contract.
Challenges Of Ethical Investing
The ESG factors are also used as measurements to score individual companies. While this can be helpful to a degree, there is currently no standardization of the actual scoring system.
This can lead to a company having varied scores from different rating agencies and data providers, and has led to considerable confusion amongst companies and investors alike. There are hopes within the investment community that, at some point, there will be a more cohesive scoring system.
Another challenge is the phenomenon of “Greenwashing”. This is when a company reports that they are being more ethical than it actually is by manipulating statistics and narratives. This is why it is important to verify that you are using ESG scores from reputable resources.
Research Your Ethical Investment Options
If investing in line with your values is important to you, we would suggest that “the best defense is a good offense”. If you are going to put your money into ethical investment options, you might want to consider doing a good amount of research beforehand. Some ways to do your due diligence to avoid companies that may be Greenwashing are:
- keeping up to date with constantly changing ESG standards and best practices,
- using multiple sources and data analysis,
- encouraging companies to discuss their ESG practices, and
- promoting the standardization of ESG metrics and reporting.
Along with ESG research, you may want to look at the basic investment considerations that go along with researching ethical investment options, such as:
- determining your personal values and investment goals,
- evaluating and choosing sustainable investment products,
- having a diverse portfolio,
- monitoring and reviewing your investments regularly, and
- letting your voice be heard by the company and participating in shareholder meetings.
Doing your research and focusing on ethical investment options can help you see negative ESG outcomes in companies you might invest in. This may cause you not to invest in a company, whether or not it is currently profitable by other standards.
Damaging environmental factors can include both active and passive factors, like the company not accounting for climate change, resource scarcity, and toxicity in the supply chain. If the company runs out of materials necessary for their products and they cannot find a replacement, they will likely go out of business.
An example of this was shown in the movie “Erin Brockovich”, which follows a single mother finding out the local water treatment plant was using harmful chemicals to avoid rust. The company, PG&E, misled the surrounding town, even saying it was the ‘safe version’ of the chemical.
Similarly, when it comes to the social component, having significant labor issues and community conflicts could decrease the performance of their employees and tarnish the company’s reputation over time.
“Fast fashion” is probably one of the most recognizable examples of this. Many companies produce their clothing in Asian countries due to the lack of oversight of the plants and the ability to use child and slave labor to keep costs extremely low.
Finally, problems with the governance of the company, such as a lack of transparency or poor management, can lead to scandals or even criminal charges that the company may not be able to rebound from.
A very well-known example of this is the investigation into Enron in the early 2000s. This investigation found that Enron had generated false profits, hid the real amount of its debt, and sold energy at an overinflated rate. The company went bankrupt, and their reputation was forever linked to this deception.
The Positives And Negatives of Ethical Investing
There are many positives of choosing ethical investing options, some of which can include:
- positive social impact,
- regulatory and compliance benefits due to the companies being less likely to violate laws,
- possible long-term financial gains,
- harmonizing your values and finances, and
- the long-term change that could result from more ethical investors encouraging more businesses to incorporate ethical practices.
However, there are also some negatives that can go along with ethical investing, including:
- limited ethical investing options,
- decreased short-term gains,
- ESG scores are not the same across all reporting agencies,
- the Greenwashing risks mentioned above, and
- the incredible amount of research that needs to be done to vet a good ethical investment.
Is Ethical Investing Worth It?
Yes, it certainly can be worth it for you to focus on ethical investment options. As more people choose this option, it could have beneficial effects socially, environmentally, culturally, and economically. Some of those benefits may include:
- safe, fair working conditions for employees across the globe,
- more sustainable use of resources, including the prioritization of renewable energy sources,
- a possible shift from individualistic to collectivistic thinking,
- financial compensation that allows employees across the world to afford at least basic needs like safe shelter, nutritious food, durable clothing, and reliable transportation.
Additionally, there are a few signs that show that it can sometimes be profitable to invest in ethical companies. One report states that the 2025 market value of ESG investing is $35.48 trillion, and projects this figure to increase to $167.49 trillion by 2034.
When you think about ethical investing that way, then even if you start with just one ethical investment, it could be a step in the right direction, both for your portfolio and the world.
Feel Good With Ethical Investment Options
If you are looking to connect your values to your investments, we would love to discuss some options with you.
As far as ethical investment options are concerned, here’s what you could expect if you wanted to work with us:
- A rigorous evaluation process through which we develop a deep understanding of your needs and values not just as a client, but as a human being;
- An analysis of your investment objectives so that we can co-create a comprehensive strategy to help you work towards your financial targets;
- A tailored investment portfolio that will help you pursue both your short- and long-term objectives; and
- Constant monitoring and adjustment of your portfolio, measured against progress towards your unique goals, not a market index.
Schedule an appointment today to meet with an Iron Point Financial CFP® and discuss your finances, values, and investment goals for a brighter tomorrow.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
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Disclosures
ESG/SRI Funds Disclosures
ESG/SRI funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider or advisor, as applicable, for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria.
The index provider or advisor’s assessment of a company, based on the company’s level of involvement in a particular industry or their own ESG criteria, may differ from that of other funds or an investor’s assessment of such company.
As a result, the companies deemed eligible by the index provider or advisor may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics.
The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies.
Successful application of the screens will depend on the index provider or advisor’s proper identification and analysis of ESG data.
The advisor may not be successful in assessing and identifying companies that have or will have a positive impact or support a given position.
In some circumstances, companies could ultimately have a negative or no impact or support of a given position.
Mutual Funds & ETFs Disclosures
Investing in mutual funds and ETFs is subject to risk and loss of principal.
There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.
Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing.
The prospectus contains this and other information about the funds.
Contact your financial professional to obtain a prospectus, which should be read carefully before investing or sending money.
General Disclosures
All investing involves risk, including the possible loss of principal.
There is no assurance that any investment strategy will be successful.
