What Is Ethical Investing?
Let me explain ethical investing to you directly: it's the practice where you use your own ethical principles as the main filter when picking securities for investment. It all depends on what you personally believe in. People sometimes mix it up with socially conscious investing, but those funds usually follow one big set of rules for their portfolios, while ethical investing gets more personal for you.
Key Takeaways
- Ethical investing means selecting investments based on ethical or moral principles.
- Choosing based on ethics doesn't guarantee how the investment will perform.
- You typically steer clear of sin stocks, which are companies tied to things like gambling, alcohol, smoking, or firearms.
- When analyzing, you should check if the company's actions match their ethical claims, along with their past, present, and future performance.
Understanding Ethical Investing
As an investor, ethical investing puts the power in your hands to direct your money toward companies that match your practices and values. Your beliefs might come from environmental concerns, religion, or politics. You could decide to skip entire industries or pour more into sectors that fit your ethical standards.
For instance, you might avoid sin stocks—those companies deeply involved in unethical activities like gambling, alcohol, or firearms. Remember, picking investments this way doesn't tell you anything about how they'll perform financially.
To get started, you need to carefully list out what investments to avoid and which ones interest you. Doing thorough research is key, especially for indexes or mutual funds, to make sure they truly align with your ethics.
History of Ethical Investing
Religion has often shaped ethical investing. If that's your motivation, you'll avoid industries that go against your faith's teachings. In America, the Quakers in the 18th century were among the first, banning involvement in the slave trade.
Around the same time, John Wesley, who founded Methodism, taught against investing in industries that harm others, like chemical plants. Islamic banking is another example, steering clear of alcohol, gambling, pork, and similar forbidden areas.
In the 20th century, it shifted more toward social views. Ethical investing reflected the political and social moods of the era. In the 1960s and '70s in the US, you saw investors supporting worker rights and equality while avoiding anything tied to the Vietnam War.
By the 1990s, the focus turned heavily to the environment. Investors like you moved away from coal and fossil fuels toward clean, sustainable energy. Today, it's still mainly about environmental and societal impacts.
Fast Fact
Take the Amana Mutual Funds Trust as an example: they provide investment options that follow Islamic principles, banning things like gambling (Maisir), interest (riba), and extra charges for late payments (murâbaḥah).
How to Invest Ethically
Beyond just ethical checks, you have to look at the investment's historical, current, and projected performance to see if it's solid and could bring good returns. Reviewing the company's history and finances is essential. Also, verify their real commitment to ethics.
A company's mission might sound perfect and match your values, but their actual practices could contradict it. Look at Enron—they had a 64-page ethics code emphasizing integrity, but they ignored it and broke numerous laws.
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