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What is Ethical or ESG Investing (And How Do I Get Started)?

Categories: Finance,Latest News

Thank you to our partners at Black Swan Capital for teaching us about the ethical choices we can make with our money!

Investing has a reputation for being an exclusive activity for wealthy people with no concern for environmental or social issues. But that’s not true! And it doesn’t have to be that way!

Over the past few years, people have become more and more interested in ethical investing. Rather than encourage bad environmental practices and poor working conditions, investors want companies to do better.

And voting with your money is one of the best ways to make it happen!

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What Is Ethical Investing and What Makes an Investment Ethical?

In short, ethical investing focuses on helping socially responsible companies grow. Usually the entities have high standards for environmental, social, or governance (ESG) practices.

Investment firms that promote these portfolios look to the United Nations Sustainable Development Goals as a starting point. The UN outlines 17 goals, which include targets like eliminating hunger, encouraging innovation, building sustainable cities, and producing clean energy.

Ideally, the world will accomplish these goals by 2030. The UN also outlines their six Principles of Responsible Investment (PRI) for investment managers:

  • Take into account ESG factors when making investment decisions
  • Address ESG concerns within a company’s own practices
  • Research an entity’s ESG practices when investing
  • Promote the PRI within the investment community
  • Share best practices with other ESG-mindful investors
  • Report the efforts the investment company made to promote the PRI

As of 2020, the PRI has over 2,300 signatories! Investment managers all over the world are taking notice and adding ESG businesses to their portfolios.

Furthermore, as millennials reach a point of financial security, they want to invest. And this generation wants to invest their money in businesses that aim to achieve the UN’s sustainability goals. So how can individuals and investment firms support and promote these efforts?

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How Does Ethical Investing Work?

Ethical investing works the same way as any other form of investing but focuses on businesses with high ESG standards.

Investment companies spend a lot of time researching companies, industries, and emerging technologies. Based on what they learn, they’ll choose options that seem to promise high returns on investments. An ethical investor, however, will also strongly consider how businesses incorporate ESG factors into their practices.

Investment managers then build portfolios based on that research. Usually it’s a nice combination of businesses that are high and low risk.

High-risk investments tend to have higher returns, but because they’re risky, they can also lead to losses in the shorter term. Low-risk investments, on the other hand, tend to have consistent but lower returns.

Does Ethical Investing Mean Sacrificing Returns?

In regards to investment returns, there’s not much difference between ESG-minded businesses and businesses that aren’t. In fact, businesses that emphasize ESG practices tend to be more stable and experience more growth over time.

“You can still achieve the goals you want to achieve with an ethical portfolio,” says David Bellingham of Black Swan Capital.

Morningstar also reported in 2018 that ESG portfolios perform just as well if not better than non-ESG investments. They also mention that “the constituents of the ESG indexes have been less volatile and possessed of stronger competitive advantages.” In other words, they’re a good choice for steady returns in the long run!

And remember: sustainability is an ongoing effort. Goals like eradicating poverty, eliminating world hunger, and achieving world peace aren’t accomplished overnight!

You should approach your ethical investments the same way. An ESG portfolio will not only be good for your financial health but for the betterment of the world, too.

Industries are slowly but surely changing their behaviors and practices to meet customer demands for ethical practices. And as sustainable efforts become commonplace, ethical investing will become the norm, too.

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How Can I Be an Ethical Investor?

As long has you have money to invest, you can be an ethical investor!

Connect with an investment management company that shares the same values. Not only will they invest in companies you want to support, but they will also know how to build portfolios wisely.

Contact Black Swan Capital to learn more about ethical investing!