The opening of the meat company, Beyond Meat, in the US caused quite a lot of stir. Its stocks had risen by 163% on listing, which attracted a lot of investors. However, the debate was still on whether its bright prospects will continue in the long run. In fact, the success of Beyond Meat shone the spotlight on ‘ethical investment’ all over again.
What is ethical investment? It’s a type of an investment that is based on the investor’s core values including social, moral, religious and/or environmental values. Governance factors play a crucial role too in ethical investment. So one could ethical investment is the kind that does not break any laws –whether social, moral or legal.
Ethical investment can be done in many ways. One of the ways is for investors to never invest in stocks that display “sin” traits or features. The other way is impact investing in which investors select stocks with particular features that drive impact.
If investors go by that logic, certain industries are automatically removed from the list of potential investments. Industries such as tobacco, civilian firearms and controversial weapons are out of the question as these things have the potential to kill if used as they’re supposed to be.
Apart from these the other industries that are excluded from the realm of ethical investment include thermal coal, adult entertainment and alcohol. It is to be noted here that as of now, there really isn’t a standard definition of what constitutes as ethical investment. It’s entirely up to the discretion of the investor.
Ethical Investment – The strategy behind it
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As far as retail investors are concerned, only a few ethical investment options exist-
- Mutual funds, Taurus Ethical and Tata Ethical, are options
- And so is Reliance Sharia ETF BeES
As of now, ethical investment in India is in its initial stages. Several investors don’t even know that options for ethical investments exist in the country.
Irrespective of the option an investor chooses, it is vital to evaluate and analyse the philosophy the investment fund follows so that one can be sure there’s a match. For example, if we take Shariah principles into account, companies that engage in the business of lending and earn interest-based incomes should be avoided at all costs. Banks, top-tier IT companies and NBFCs come under the umbrella of such companies and are hence, blacklisted as far investing is concerned. That said, firms that offer high investments and earn their income from internal accruals.
If you want to build a portfolio of ethical investments that are in line with your values, you will first need to know which stocks, sectors and funds to avoid. This could be any type of company. Maybe you are an environmentalist and hence, shouldn’t invest in a mining company as their activities cause environmental damage. Same logic applies to another investor if he/she is a vegetarian. In that case, meat companies are out of the question.
Once you’ve figured out which sectors to avoid, figure out among the list of your chosen companies if they have subsidiaries that indulge in activities, which don’t align with your moral code. Scan them for violations of codes of conduct before you zero in on them. Also figure out if the said companies have any plans to violate the ethics you rely on. Lastly, assure that the companies you pick stick to your moral code by monitoring them regularly.
Ethical investment is not simply about moral victories
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The thing about ethical investment is that even though it’s in line with your morality, it may not yield the highest returns. But since investing ethically is important to you, you might treat returns as a secondary factor rather than a primary one.
However, that is not to say that every ethical investment will be a low yielding one. Cases of ethical investments outperforming so called ‘unethical’ in terms of returns exist. Plus, ethical investments enjoy a major benefit of longevity and reliability.
Research shows that sustainable funds tend to outperform large as well as mid-cap funds in one and five year periods. It’s only in three-year periods that they offer lower returns. Since ethical investment is founded in high quality and stable stocks, the long-term benefits.
The dangers of ethical investment
It’s good to stick to your moral ground when investing your hard-earned money. But is that the best decision to make as far as your portfolio is concerned? Just like other investments, investing ethically has its own set of limitations.
First and foremost, you can’t possibly know everything about the company you’ve invested in, which means you don’t know for sure if the investment made was indeed ethical. Plus, there’s a chance that even if you pick a company after performing a thorough background, it may always diversify into a sector you don’t want to invest in. In that case, you might have to de-invest and compromise on the returns you get.
Besides, you may have to carry extensive research to know if your chosen company follows the same principles as you do to ensure returns. It is highly likely that you might not be every vertical of the company invested in it. Moreover, the lack of a proper definition of ethical investment can be problematic too. Since there isn’t a standard definitions, companies may claim that they adhere to the investor’s principles without actually following them. Hence, due diligence on your part is necessary.