How To Become an Ethical Investor

The proliferation of online share trading platforms has propelled ethical investing into the mainstream. Many of us are now asking how to combine our personal values and social responsibility with an investment strategy. Ruth Henderson shares six tips on how to do that.

The emergence of new and easy-to-use online investment platforms has brought a new-found awareness of what we might all be investing in. Suddenly, our conscience and our ethics demand some attention as well.

‘Ethical investment’ is a broad topic, with many variables to consider. To help you think it through, consider your values and desires for the society around you. This could serve as a framework to help you decipher what may or may not be an ethical investment. Because what might sit well with one person’s ethics and conscience may not sit well with another.

Ask questions and act on your findings

Ethical investing starts with putting your ethics first as a consumer.

Start at home. Look at your daily buying decisions, and consider what your choices say about you. For example, by choosing to support Supermarket A over Supermarket B, you say that you value what A provides more than B.

You can look deeper into the grocery store you support and ask a couple of questions such as:

  • Who owns the store?
  • Where and how do they source their products?
  • Are their suppliers, producers and staff happy?

If you dig down just a little, you might either comfort yourself knowing you are happy with your supermarket choice, or you might decide that you will take your business elsewhere.

Explain your ‘why’ to the business

You can simply walk away from a business, taking your money with you. Or you can explain to the company why you decided not to support them anymore. For example, they may be selling an internationally-sourced product using questionable human labor practices that are putting a local well-run producer out of business.

When you choose to buy shares and invest in a company, it’s the same principle; you are supporting their business objectives. However, you can also invest in a company because you want to take part in making changes to their business - by owning a part of that business, you have a voice.

Exercise your rights as a shareholder activist

When you buy a share in a company, you also buy the right to attend certain investor events and meetings that they hold. This means that you can be an active participant in your investment and influence the management of the company.

A shareholder activist gets to have their say in the operations of the company they are invested in and can add their thoughts to the corporate governance of that company. By being an ethically conscious investor, you can choose to support what you like and change what you don’t.

Here’s a personal example that shows how my personal values and ethics collided with practical investment. My first job saw me working for a huge confectionery manufacturer. I worked hard, received low pay, and sustained a long term injury at my place of work. They treated me and many others poorly, resulting in me leaving the company.

I followed their progress for many years as they were acquired by larger and larger multinational companies until eventually, my former workplace was seen as uneconomic to run, so they closed it, leaving hundreds of staff unemployed. This had a major economic impact on the individuals and the city they were located in.

When I left, I vowed that I would never ever buy their product nor support anything they ever did, and I’ve stuck to that. Yet when I became an investor who purchased the US500 Exchange Traded Fund (ETF), that company now sits within the fund I buy. So by owning a small piece of them, I’m inadvertently supporting the business model that I never agreed with. However, I now also have a right to voice my opinions if I choose to.

Beware of analysis paralysis

Becoming an ethical investor is a good thing. You can choose to make your support or disapproval known about issues you care about, like the environmental impact of coal-fired power plants on climate change, or about the social impact a company is having on a community, such as an alcohol provider pushing products into at-risk communities.

The downside is that analysis paralysis can come as a result of digging so deep into something that you get paralyzed by choice and therefore do nothing, buy nothing, and never actually start to invest.

Remember your investment goals

Another downside is that by supporting a handful of companies because of their strong ethical practices, you may possibly lose out in other areas, such as lower annual returns or the fact that they may never pay a dividend. Also, investing in just one or two individual companies is far riskier than investing in a passively managed low-cost ETF.

Therefore, it’s a matter of finding a balance between your ethics and the reasons for wanting to become an investor in the first place: to support companies that you believe in and grow your wealth over time.

A final tip

When you are researching, look for companies that specifically exclude the likes of weaponry, coal, nuclear power, oil sands, tobacco and companies that have failed the United Nations Global Compact rulings. You are looking for ‘ESG’ companies; these are companies and funds that adhere to Environmental, Social and Governance standards.

By beginning at home and making ethical choices with every dollar you spend, you’ll begin to put thought into everyday consumer decisions. You’ll become more aware of the touchpoints you have with various companies and their products throughout your day. This will, in turn, start to guide you on what share market investments you may choose to make, ensuring that they sit well with your personal value system.

Ruth blogs at all about how she and her family handle money. What’s the secret? Spend less than you earn, invest the difference, avoid debt and budget each dollar that flows through your hands. She firmly believes that if you can just get the basics right, life becomes easier from there on in.

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