Ethical Investing Explained: Understanding the Different Types of Ethical Investments

ethical investing explained little green tree growing

Have you ever thought about ethical investing? Does it actually exist?

Absolutely it does! And it’s quickly becoming more and more popular, particularly with first time investors and the younger generation.

Since edging its way into the investment world during the 70s and 80s with socially responsible investing, ethical investing has gained prominence and evolved over time.

This evolution has created a number of niches and similar terms that all sit under the ethical investing umbrella. You’ve got ESG, SRI, sustainable, green and impact investing to name just a few.

For first time investors like me, this can be a little confusing, if not overbearing – what’s the best ethical investment type to put my money into? What’s going to have the biggest positive impact on my finances, on the environment and society?

Fear not and let me clear everything up for you as quickly as possible. By the time you reach the end of this blog, I hope you’ll be confidently on your way in the ethical investing world. If not, let me know!

What is ethical investing?

Ethical investing is a broad term that arches over several similar, but distinct, types of investments. We’ll get on to these shortly.

It’s not a contradiction in terms. Ethical investing does exist and it could play an important and powerful role in creating a more sustainable future. Here’s why.

Ethical investing has a dual purpose:

  1. To make a financial return
  2. To do good in the world (or at least avoid the bad)

If more funds made their way into ethical companies, we’d see more development and more innovation of ideas that can be used to unpick and replace the harmful practices that currently exist.

Ethical investing isn’t a regulated term. This is why it’s used fairly loosely to describe investment types that have a sustainable and responsible aspect to them. It also comes down a little bit to investor opinion and individual principles, although I think we can all agree that businesses involved in, for example weapons trading, isn’t the most ethical.

The primary aim of ethical investing is to invest money wisely with a future return in mind, but through a socially responsible filter.

This makes ethical investing clearly distinct from traditional investing, which seeks to maximise financial returns regardless of the environmental or social factors.

This doesn’t mean that all traditional investing is bad. It’s just that traditional investing may be funding activities and businesses that don’t sit right with the more ethical and socially conscious investors.

Main types of ethical investing

There are a few different types of ethical investing.

Confusingly, they can be known by different names – Ethical, Responsible, Sustainable, Green, Eco, ESG and Impact.  

Although these investment types target broadly the same businesses, there are some important nuances to be aware of. Let me explain.

All investments aim to make a financial return (point 1 above), so this can be taken as a given.

Many of the differences between the types of ethical investing come in the ‘doing good’ part, the second purpose of ethical investing.

Some of the main ethical investment types are:

  • Socially Responsible Investing
  • ESG Investing, sometimes known as Sustainable Investing
  • Eco or Green Investing
  • Impact Investing

Here’s a quick run down on each.

Socially Responsible Investing

The desire to invest responsibly first came about in the US in the 1970s with Socially Responsible Investing (SRI).

SRI allowed certain investors of a moral persuasion to bypass particular industries – guns, gambling, tobacco and others – which they didn’t deem as socially responsibly.

SRI operates with a filter out the bad and invest in the rest policy.

What is ESG Investing? (aka Sustainable Investing)

ESG investing seeks to maximise financial returns whilst taking three key areas of the investment process into account – Environmental, Social and Governance – handily known as ESG.

ESG investing starts off in a similar way to Socially Responsible Investing by removing some of the ‘bad’ industries – weapons, tobacco etc.

The process then differs by actively looking at the ESG factors for each company. These cover:

  • Environmental issues – carbon footprint, resource use, pollution, waste management, energy use
  • Social considerations – gender equality and diversity, conditions for workers, human rights and community relations
  • Governance – how the company is run. Key questions here include, who makes up the board? Are there anti-corruption policies in place? Are there any political links? What do the executive compensation packages look like?

Funnily enough, it was the Church of England who helped bring ESG investing into the mainstream during the 1990s. The Church wanted to make sure their investments weren’t going into what they thought of as bad or unethical businesses that didn’t align with their own values.

It’s not to say they are the best, but the companies who pass the threshold and meet ESG requirements are generally good corporate citizens, which makes ESG investing a great way to invest ethically.

Eco or Green Investing

‘Green’ is often used as a catch-all term for anything that is environmentally friendly.

In the investment world, green or eco investing is a more focussed form of ethical investing, which picks out projects and businesses that want to solve an environmental problem through a product or practice.

The companies involved in greener solutions for the environment are often technology-led and aim to replace existing products and practices, for example electric cars aiming to replace petrol cars.

Green investing tends to support companies involved in reducing pollution, lowering carbon, improving waste management and creating cleaner renewable energy alternatives.

Eco investing has gained popularity since the 1990s when the world’s environmental problems really started to hit the mainstream.

Impact Investing

Impact investing is one of the newest forms of ethical investing and has a clear distinction to the other forms discussed above.

Impact investing is the financial backing of a company whose outright aim is to have a positive impact on the environment or society, as well as creating a financial return over the long term.

Rather than investors just screening out the companies that have a negative impact on the environment or society, impact investors pro-actively seek and invest in businesses that plan to have a significantly positive impact on the world.

According to Charlie Macpherson, Impact Specialist at tickr impact investment platform, impact investors place a large emphasis on measuring the non-financial effect of a company in order to maximise the positive influence of the investment portfolio.

tickr impact investment app and mobile platform
tickr, an app-based impact investment platform. Source: tickr.co.uk

One way to look at impact investing is the ‘additional extra’ a company brings to the environment or society – would the same positive impact be available if the company in question wasn’t around?

Impact investments also have a strong alignment with the United Nations Sustainable Development Goals (SDGs), of which there are 17. These 17 overarching SDGs aim to solve key global issues, such as ending poverty, combating climate change and conserving our natural environment.

The companies that are targeted by impact investors are often trying to solve one of these global issues too.

Of all the different types of ethical investing, impact investing could have by far the biggest, most powerful impact on the future of our environment and society.

Is ethical investing important?

If you care about the environment and social responsibility, then yes ethical investing is very important.

Although many ardent environmentalists may not want to admit it, money is at the centre of almost every society. With such a powerful standing, where people keep or invest their money can play a significant role in the advancement of society and what direction this takes.

Banks use the money sitting in them to invest and fund different projects. Some banks take the traditional investment route and will fund any project as long as there’s a return involved. Other banks have policies to only invest in more responsible businesses.

This is why swapping to a more ethical bank can be a strong statement of intent. Theoretically, if all money was invested into sustainable, ethical companies, we’d have a much more sustainable and ethical society.

Investing is a vote for the future. Ethical investing will help investors increase their financial value whilst supporting companies who want to do good for the world. For this reason, ethical investing is important.

Does ethical investing work?

Many in the traditional investing camp will say that you can’t maximise profits whilst investing in companies who put sustainability and ethics at their centre.

Prioritising pure profit over anything and everything else usually leads to two places eventually: an economic crash or an environmental disaster. This form of traditional investing to maximise profit at all costs just isn’t sustainable over the long term.  

Investing ethically doesn’t necessarily mean a compromise on financial returns.

The evidence suggests that ethical investing absolutely works on its two core elements:

  • Delivering a return on investment over the long term
  • Funding ethical and socially responsible companies

Yes, ethical investing absolutely works.

Do ethical funds underperform?

It used to be a common view that ethical funds underperformed when compared to traditional funds.

The market has changed and continues to change, making this an outdated view.

With governments increasing support for green companies, there’s been an increase in sustainable fund values, which have performed very well over the last decade.

Recent evidence even suggests that sustainable funds have outperformed traditional funds over the 10 years and in 2020, dedicated ESG and sustainable funds surpassed the $1 trillion mark for the first time.

As the world tries to adapt to more climate friendly policies and ways of doing things, ethical investing has become more mainstream, and also more important.

Investors can now be confident that ethical funds have the ability to perform just as well, if not better, than traditional funds whilst having a positive impact on the world. Win-win.

Can you invest ethical or is there a moral dilemma?

I previously, and rather naively, assumed that all investing was about big banks, people in suits, wads of cash and swanky offices in the heart of cities. Some of these cliches may or may not be true!

Considering investing to have an ethical side didn’t come into the view for me.

What I have since learned is that investing and ethical actions are highly compatible.

The normal aim of investors and companies is to generate a profit. Although this is sometimes achieved through unethical means, it doesn’t mean that all profit-making investors and companies are unethical.

In fact, some prioritise non-financial returns just as much as financial.

Just look at Certified B Corporations, like Brewdog and Innocent Drinks, who care just as much about their environmental and social performance as they do about profit. I don’t think either of those companies would have been a bad investment a few years back!

Impact investment platform tickr are also a Certified B Corp. As Charlie from tickr informed me, the size of change required to create a more sustainable and socially just world is vast. We can’t always depend on governments to make those changes either.

Input is required from lots of different parties, including policy makers, regulators, businesses, consumers and investors.

If an everyday saver, such as you or me, want to make an investment that is aligned with our moral values, we shouldn’t feel guilty about it. Especially not if we are making an impact investment to support companies that are looking to drive positive change.

More ethical investment is necessary if we are to change the course of climate breakdown and society development across the globe. If anything, investing ethically should be encouraged more.

How to ethically invest?

Thanks to the advancement of technology there are now many different ways for the everyday person to ethically invest. Some are much easier than others.

Many of the big traditional investment houses now offer ethical investment funds alongside there not-so-ethical funds. However, getting into ethical investment this way is unnecessarily difficult due to the bureaucracy and complex ways of the financial industry.

There are more ethical investors, such as WHEB and Triodos (which is also a bank), who make the process easier and offer a number of different funds. The added advantage here is that it’s not just a green option alongside the bad stuff, these institutions have ethics at their core.

A good place to start for many first time investors is an app-based investment platform. Personally, I started off with Moneybox who offer a sustainable ISA with good return rates.

I also have opened a Stocks and Shares ISA with impact investment app tickr. The guys at tickr are purely focussed on impact investing and you have a choice to invest money into their people, planet or combined theme. It’s extremely easy to get started and a place I’d recommend.

Can sustainable investing form part of an environmental and social solution?

I think the answer to this is a unanimous yes!

Sustainable investing, particularly the newer form of impact investing, has the potential to create huge, positive change for the future.

Of course, it forms a part of the solution alongside other actions – more eco-friendly living, reduced energy consumption, eating less meat, reducing carbon emissions to name just a few.

One of the issues people who want to do better face is that many ethical alternatives and sustainable solutions are currently more expensive than their less ethical counterparts.

The more money and funding that goes into ethical and green companies, the more research can be done, the more technology can advance and eventually the cheaper the end product will become.

We’re currently seeing this with the likes of electric cars and solar panels, which are gradually making the transition to mainstream and becoming more affordable.

ethical investing in the palm of your hand

There you have it, ethical investing explained and hopefully made more understandable for you.

For first time investors and young investors, the prospect of ethical investing can be a little daunting. However, ethical investing is now so much more accessible than it was even just a decade ago.

Ethical investing has evolved over time from just avoiding the unethical companies to actively seeking out the businesses with big, positive visions for the environment and society.

For the eco-conscious person looking to invest, perhaps for the first time, impact investing may be the truest and most ethical form of investing for you to get involved with.

Over time, ethical investing will leave both your finances and the world in a more sustainable place.  


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