A how-to guide to ethical investing.
As a citizen who’s conscious about where you put your money, you may have some questions about how to invest ethically. Or, maybe you’re more motivated by not putting your dollars into an industry that you disagree with. Perhaps you want to support businesses that are making a positive, measurable impact?
The good news is, you can. Today, more Canadian investors—particularly millennials—are putting their cash into investments that can both turn a profit and “do good” in the world. Indeed, 73 percent of Canadians want to know more about responsible and ethical investing, with older investors showing a large jump in their interest in the last year, according to a 2021 survey by the Responsible Investment Association (RIA).
But what are ethical investment funds, what does it take to get started, and what are the benefits? In sum, ethical investing is quite personal and quite possible. And, with the right information in your back pocket, you can quickly get on the road to making it happen.
What is ethical investing?
Ethical investing involves matching your investment portfolio with your personal values. That could mean choosing stocks or funds that align with your social, moral, or religious beliefs.
“Ethical investing means putting your values ahead of—or at least on par with—profit in your investment decisions,” says Robb Engen, founder of personal finance blog Boomer and Echo.
For instance, a climate-concerned investor may build a portfolio that invests in renewable energy. An animal lover may seek to support industries committed to improving animal welfare. Other investors may simply exclude certain stocks (such as guns, gambling, tobacco, and alcohol) but are cool with companies engaged in fossil fuels or animal testing.
Finding out what it really means to invest ethically and the differences between terms like ethical investing, responsible investing, impact investing, among others, will help you create an investment portfolio that represents your attitudes and beliefs.
How do you get started in ethical investing?
Generally speaking, ethical investors seek to build an investment portfolio comprised of industries that they consider to drive positive change in the world. But figuring out what that looks like can be tricky.
For instance, if you’re a climate-concerned investor, you may seek to build a fossil-fuel-free portfolio. But how do you feel about fast food, construction, and airline companies? These industries are contributors to climate change, too. So doing your research is key.
You just have to remember there’s no “one-size-fits-all” approach to ethical investing—and that’s the best part. As the old saying goes, perfection is the enemy of good. Getting started involves some soul-searching about your own values and coming up with a list of priorities to determine your bottom line. (If you’re struggling to find your footing, a Coast Capital financial advisor can help you figure out how to approach an investment plan that works for you.)
What are the different types of ethical investments?
When it comes to ethical investing, a lot of terms are thrown around interchangeably: sustainable funds, ESG (environment, social, and governance) investing, and socially responsible investing. In general, they all fall under the umbrella of responsible investing—a form of investing that considers environmental, social, and governance issues, while still focusing on possible returns.
Responsible investing portfolios, like the six Sustainable Fund options offered by Coast Capital, are designed for investors seeking to grow their investments while supporting businesses that promote sustainable development and social responsibility.
Despite subtle differences, each responsible investing strategy can offer a useful approach on how to invest ethically, and none are mutually exclusive. Here are some highlights on the top ways to invest:
ESG investing: ESG investing uses a broad range of environmental, social, and governance (ESG) criteria, along with other traditional financial measures, to choose investments.
“ESG refers to Environment, Social, and Governance factors to be included in review on investments, typically done on top of the normal investment process,” says Brian Mayhew, Director of Wealth Management Investments at Coast Capital. “There is a belief that companies that have good scores, or at least not negative, on these metrics will produce better, more repeatable returns.”
It’s kind of like using a scoreboard to guide your investment choices. For example, environmental criteria can assess a company’s resource depletion, energy use, and treatment of animals, while social criteria evaluates a company’s relationships, such as how it treats people. Meanwhile, governance criteria assesses how the business is run, looking at things like board diversity, bribery or corruption charges, and transparent accounting methods.
So, for an ESG investor, profitable companies that score high on various ESG factors— such as fair labour practices, board diversity, or net-zero pledges—might get “screened in” to an investment portfolio.
However, this approach does not exclude entire industries, like fossil fuels or tobacco. For example, an oil and gas company may end up in a portfolio if it has a strong commitment to female board leadership or exceptional working conditions.
“Rather than excluding the entire energy sector, companies in this category would be given an ESG score and only the highest-rated firms may be included in an ESG fund,” says Engen. “Or, an ESG fund may apply a negative screen and remove all of the firms whose ESG score fell in the bottom 25 percent.”
Socially responsible investing (SRI): While ESG investing makes choices using a “scorecard” based on broad criteria, socially responsible investing takes it a step further and selects investments to also match your personal values. So, in addition to applying ESG criteria, positive and negative screens are used to decide whether to include or exclude certain companies or entire sectors.
For example, a socially responsible investment (SRI) fund may include companies with high ESG scores, while also excluding certain industries (think: tobacco, fossil fuels, guns, gambling) that may not match an investor’s values.
Sustainable investing: The term “sustainable investment” often falls in the same camps as “responsible investment” and “socially responsible investment.”
Specifically, there are a growing number of mutual funds and ETFs that only invest in companies they deem to be sustainable or that are carefully screened for their environmental and social impact.
“Sustainable investment is an investment approach that considers ESG factors in portfolio selection and management,” says Mayhew. “Sustainable funds use these elements in helping pick investments. Some themes might include Green Energy, Clean Water, Green bonds, or Gender Diversity.”
Why choose ethical investments over others?
For starters, ethical investing can help grow your nest egg. More research from the RIA study shows that responsible investments can perform just as well—or even better—than traditional investments. It’s partly because incorporating ESG factors can help reduce exposure to risks not typically visible within corporate financial statements, leading to better long-term financial success.
For example, a study by Carleton University found that SRI equity mutual funds in Canada outperformed their respective benchmarks 63 percent of the time. Another 2021 study by SOM for Desjardins found that responsible investment funds outperformed traditional Canadian equity, U.S. equity, and global equity funds over three-, five- and 10-year periods.
But perhaps the biggest benefit to ethical investing? Feeling good about where you park your hard-earned bucks.
“You want to help build a better future that cares about the environment, gender equality, social justice, human rights, and more,” says Engen. “You vote with your wallet to encourage companies to change for the better.”
Inspired to start ethical investing? Check out our webinar to learn more. You can also make an appointment to speak to one of our financial advisers about building an investment plan that aligns with your values.