Ethical investing is a growing trend. Investing your money in companies that align with your values is a great way to feel good about what you’re doing with your money. It may also be an excellent way to increase the value of your portfolio.
Ethical Stocks Investment Strategies
How do you identify ethical stocks? How can you be sure the companies you invest in are ethical? Here are some tips for identifying ethical stocks.
The ethical investment code you follow depends on what’s important to you. Various strategies are used by moral businesses to change the world. Identifying the ethical credentials of an investment opportunity is done using four main techniques:
ESG screening. ESG stands for “environmental, social, and governance” and is a framework investors use to screen companies based on their environmental impact, labor practices, and other factors that affect the company’s bottom line. A company with positive ESG might not have the highest returns, but it’s more likely to impact society positively.
In applying ESG filters to a portfolio, a fund manager might ask:
- How does a company manage the risk of becoming obsolete if mineral reserves run out in a decade?
- Can weak safety procedures end up costing the company money?
2. Negative Screening And Divestment
The easiest way to avoid investing in companies with questionable ethics is to not invest in them. Negative screening identifies companies that do not meet your ethical standards and exclude them from your investment options.
Negative screening can be as simple as avoiding a specific industry, such as tobacco or gambling, or it can be more nuanced. For example, you may avoid investing in companies that provide weapons for war or companies whose products harm the environment.
A second option is a divestment: selling off stocks in unethical businesses and reinvesting the proceeds into something else. The decision to divest can seem like an ethically sound move. In case you don’t like what a company does, you sell your shares.
3. Positive Screening
The goal of positive screening is to avoid investing in companies involved in activities that negatively impact society or the environment. Anyone who wants to influence their portfolio positively can use this investment strategy.
Positive screening involves using company codes of conduct, investor guidelines, and other ethical screens to determine which companies you invest in. For example, if a company does not meet your standards for ethical behavior, you may decide not to invest in them.
Engagement is interacting with a company to express your concerns and aspirations. The goals are to improve corporate behavior, change policies or practices, and influence the outcome of important decisions. Instead of selling shares, they take action to influence the company’s direction. Engagement lets investors’ get a seat at the table,’ which can sometimes translate into voting rights.
While taking these ethical investment steps will undoubtedly mean foregoing some potential profits that you could have made on a better-performing stock, you will sleep much easier knowing that your portfolio is not composed of companies that engage in exploitive business practices. When it comes to your money, it is never too soon or too late to make an ethical investment decision that reflects what you feel is right.