Many investors want to know that their investments are making a positive impact on our world and its inhabitants.
Socially responsible investment or ethical investing fits this bill with investors asking the hard questions about how profits are being made. Companies that make their millions through environmentally destructive behaviour or are socially irresponsible may find it harder to raise money when going public.
Of course, “ethical” is a subjective term. For example, an ethical fund manager could define tobacco and gambling as unethical yet consider alcohol to be okay. Another ethical fund could be reluctant to invest in banks because they lend to companies that damage the environment. We are seeing this affect lenders that fund coal mining for example.
Obviously, the important issue is what you, the investor, considers ethical. If you are contemplating an ethical investment then not only will you need to understand the financials of the potential investment but also ensure that the underlying businesses and their activities meet your standards.
Whilst it is difficult to lay down an exact formula for ethical investments, there are some basic values which many people share:
In Australia, many well-recognised investment names are on the list of ethical fund providers. Although some ethical funds have achieved good results, as with any share-based investment, the focus is on long-term investing and sound management capabilities of the fund manager.
Be aware that when the range of stocks available to fund managers is reduced because of ethical considerations, extra risk and volatility could occur.