I think the right starting point should be on the definition of ethical investing. Because unless we agree on the definition then whatever we discuss today will not make much sense to you. We, therefore, need to be on the same level before we discuss issues related to ethical investing.
According to Investopedia, Ethical investing is the practice of selecting investments based on ethical or moral principles. In order to do this one needs to identify a set of ethical and moral principles.
It is clear that in a pluralistic society there won’t be much agreement on these principles. Having said this I am cognizant of the fact even in a pluralistic society there are still basic ethical and moral principles that we can agree on.
What makes an ethical company?
An ethical company is one that in the process of carrying out its business does not destroy the environment, does not exploit its workers by paying them low wages and does not use child labor by itself or its supply chain. It is also one that does not produce products that are harmful.
Before you decide to become an ethical company you, therefore, need to take this into consideration. I however know that we all have differing views on what each of the principles above means to you.
There are some people that may consider a company that processes beef as not ethical no matter how they go about their work. This could be because someone is a vegetarian and looks at any company that kills animals as an ethical.
I am a vegetarian and that is why I have chosen that example as I now see animals differently ever since I became a vegetarian.
If you are not a vegetarian you may view a meat processing company differently. You may just judge a company on the basis of how they kill their animals etc.
So you interpretation will depend on your beliefs and lifestyle.
History of Ethical Investing
Ethical investing is not a new thing. It has been with us all along since time immemorial. In the following paragraphs I will present the history of ethical or principled investing
Ethical Investing Based on Religion
A long time ago when religion was still the in-thing in the western world religious beliefs were the basis for most ethical investing.
Therefore if your church was against tobacco-growing then you would make sure that you avoid all investments in tobacco-related industries. This is because investing in tobacco-related industries would be against your religious beliefs.
During the days of slavery there were a few churches that opposed this evil practice. One of those groups was the Quakers and they made sure that their investments were not tainted with this evil trade.
They therefore did not put their money into companies involved in slavery.
However there are some challenges that a Christian will face when making investments that meet their beliefs.
This reminds me of the challenges we had as a church in making investments. You see initially that particular church cash reserves were being invested in savings accounts and fixed deposits. This was because most of the members were wary of investing in stocks to avoid this ethical dilemma.
Therefore when I became the head of Finance I pushed for the church to start investing in stocks. After a debate, we eventually agreed to start investing in stocks. We could do this as long as we analyzed all the business that those companies we invested in were involved in.
This is because even companies invest their excess cash too and sometimes may invest in companies that may differ from their core business. You could, therefore, invest in a sugar processing company but that company could have investments in a tobacco processing firm.
In the case of the church that I belong to, investments in tobacco-related companies are a no-no. It is therefore difficult for a religious organization to make investments that completely meet its beliefs.
A few years ago I read somewhere that the Church of England had indirectly invested about $75,000 into a pay day lending firm called WONGA. This happened through an investment fund that the church of England was using.
This caused an embarrassment to the Archbishop of Canterbury who had before this revelation taken to the airwaves to bash pay day lenders for their exorbitant rates.
It is therefore not easy for a Christian to completely avoid such situations. It requires the church to be vigilant especially when it comets to indirect investments where you don’t have much control.
Fortunately, the Church of England learned its lessons and has put in place measures to avoid these cases in the future.
Ethical Investing Based on Current social values
With religion on the wane in the western world, most of investments nowadays are made on the basis of what is popular social change at that time.
As I am writing this post, there has been an awareness of the challenges that black people are facing in America. There have been protests against police butality against black American men.
Besides these protests, the COVID-19 pandemic has also revealed the challenges that minorities face in accessing health care. This pandemic has affected minorities disproportionately. With black people more than twice as likely to die from Coronavirus than white people.
All this has forced companies to rethink their recruitment policies and also how they view other organizations. This is because companies are aware that consumers and investors may start considering this issue in making their shopping and investments.
Not long ago it was the Me Too movement that was popular and forced companies to rethink their policies on harrassment of women.
Companies that in the past swept under the carpet reports of women harrassment were forced to be decisive with such issues.
We have seen Chief Executives of big companies being forced to resign for issues related to women harassment. All this is because ethical investors are now considering this in their investment decisions.
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How do you know if a company is ethical?
In order to be an ethical investor one needs information on the companies he or she is investing in. It is fairly easy to get such information from most publicly traded companies as they are forced to disclose such information by the regulators.
On the other hand, it is difficult to get such information when buying stock in private companies. This is because for most small investors such investments will be done for them through investment funds.
However, if you are a big investor then you can use your financial clout to get all the information you need. After all, these companies will be clamoring for your money. In most cases, big investors will invest in private companies directly.
Below are a few steps you can follow to find out more about various companies.
Visit their official website
One of the easiest ways to learn more about the organisation you are investing in is to visit their website. The internet has made it possible to get information that in the past would have been difficult to get.
On the website, you will be able to learn more about their mission statement and other details.
You can also get their annual reports of almost all publicly traded companies on their websites. I would honestly start with the annual reports as they almagamate most of the information that an investor will need.
From their annual report I would be able to learn what the company does and how they are doing financially. You can also get the plans they have for the future too.
I would therefore suggest that you study carefully their annual reports to get a sense of the company. This will go a long way in helping you make up your mind on such companies.
Visit the Corporate Registry For Companies in Your State
Another way to find out about companies is to visit the government or state registry for companies. Here you can find fillings from the companies that can help you decide whether to invest them or not.
In the United Kingdom all this is centralised in the Companies House but in the United States this is all held at state level.
Google the Company
Another way you can find out more about a company is to google them. You will be surprised at the amount of infomation you can get about a company by just searching for them on the internet.
On the internet you will be able to find information from independent entities who have assessed the companies business. And if you are lucky you can find information on how these assessors have assessed whether the company is operating ethically or not.
There are organisations that assess the supply chains of most of the big brands. They will report on such issues as child labor and exploitation of laborers.
You can therefore find information that will assist you in making your ethical investments.
You can also find infomation from consumers and how they look at such companies. For instance if consumers are complaining about the service the company offers and it is one of your conditions then you can avoid such companies.
Look for Certifications
Recently we have seen the emergence of consumer organizations that offer certification to companies and their products. These organizations audit these companies’ supply chains etc to determine if they are meeting these organizations’ expectations.
If you are an ethical investor, you can, therefore, use these certifications to decide whether to invest in one company or the other.
Most of the big brands are members of these consumer organisations.
Another excellent way to find out more about what people think of various brands is to search for them on social media. The good thing about social media is that people are often very open about their opinions.
One can therefore find more information about various brands. You just have to be very careful with the information you get as some people with their own agendas can also contribute.
Contact the company for information on ethical investing
Sometimes it may be necessary to just contact the company for information you need. Most publicly traded companies have an office that deals with requests from potential investors.
You should however exercise some reasonable skepticism on the information provided as it is coming from an interested party. One may need to corroborate the information that you get from other third parties if possible.
There are however documents such as audited financial reports that you can reasonably trust without consulting independent parties. This is because auditors on the whole are trusted individuals.
Auditors can make mistakes too but that is because they are human and subject to the weaknesses that affect all of us. Otherwise they have improved the trustworthiness of financial reports.
What are the best ethical investments?
This is perhaps one of the toughest questions you can ever get asked as ethics is a tricky field. I would say that determining the best ethical investments is an individual decision.
I would, therefore, suggest that one first list down all your priorities and ethical principles that should guide your investments. This will act like a checklist against which any potential investments will be judged against.
There are however some ethical investment funds that you can choose from. An ethical investment fund will like other funds work towards making a decent return for your investments. The difference with other funds is that an ethical investment fund will prioritize environmental, social, and governance considerations in making investments.
I hope you have learned one or two things about ethical investing today. I hope that you too will join the company of responsible investors who not only want to make money but also want to be friends of the earth.
We need to make sure that that companies that we invest in are taking care of the environment and not damaging it.