Ethical investing refers to the practice of applying your personal ethical principles as the primary filter for the selecting investments. This type of investing depends on the individual investor’s views delivering a personalized result.

Some Key Takeaways

  • Ethical investing is the practice of selecting investments based on ethical or moral principles.
  • Selecting investments based on ethics offers no guarantee of performance.
  • Ethical investors typically avoid investments from sin stocks, which are companies involved with stigmatized activities, such as gambling, alcohol, smoking, or abortion.
  • Analyzing investments according to ethics include reviewing whether the company’s actions align with its commitment to ethics and its historical, current, and projected performance.

 

 

Understanding Ethical Investing

 

Ethical investing gives the individual the power to allocate capital toward companies whose practices and values align with their personal beliefs. Some beliefs are rooted in environmental, religious, or political precepts. Some investors may choose to eliminate specific industries or over-allocate to other sectors that meet the individual’s ethical guidelines.

For example, some ethical investors avoid sin stocks, which are companies that are involved or primarily deal with traditionally unethical or immoral activities. Activities such as gambling, alcohol, or firearms.

To begin, investors should carefully examine which investments to avoid and which are of interest. Research is essential for accurately determining whether an investment coincides with one’s ethics. Take note especially when you’re investing in an index or mutual fund.

 

History of Ethical Investing

 

Often, religion influences ethical investing. When religion is the motivation, industries with operations and practices that oppose the religion’s tenets are avoided. The earliest recorded instance of ethical investing in America was by the 18th century Quakers. Quakers restricted members from spending their time or money in the slave trade.

During the same era, John Wesley, a founder of Methodism, preached the importance of refraining from investing in industries that harm one’s neighbor, such as chemical plants. Another example of a religious-based ethical investing regime is seen in Islamic banking, which shuns investments in alcohol, gambling, pork, and other forbidden items.

 

In the 20th century, ethical investing gained traction based on people’s social views more than their religious views. Ethical investments tend to mirror the political climate and social trends of the time. In the United States in the 1960s and ’70s, ethical investors focused on those companies and organizations that promoted equality and rights for workers and shunned those that supported or profited from the Vietnam War.

Starting in the 1990s, ethical investments began to focus heavily on environmental issues. Ethical investors moved away from coal and fossil fuel companies and toward those that supported clean and sustainable energy. Today values-based investing is gaining interest as people seek to invest with personal integrity.

 

How to Invest Ethically

 

In addition to analyzing investments using ethical standards, the historical, current, and projected performance of the investment should be scrutinized. To examine whether the investment is sound and has the potential to reap significant returns, review of a company’s history and finances is warranted. It is also important to confirm the company’s commitment to ethical practices.

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