Choosing to invest only in enterprises which act ethically, meaning companies having "good" managements and "ethical" products and investment funds that avoid "immoral" targets.
Socially responsible investing began as socially conscious investing in the early 1970s. It achieved recognition through the successful boycotting of the African Krugerrand. The idea of "single issue funds" which did not invest in, say, South African tobacco or alcohol, was popularized in the USA. The first lay fund in the UK was launched by Friends Provident in 1983 in deference to the high principles of its Quaker roots. Most funds agree on several criteria. They do not like companies that make and sell arms, tobacco and alcohol, that test cosmetics on animals, publish pornography, destroy rain forests, disrupt native communities, or cause pollution. Some disapprove of companies that make political donations, lend money to dictatorships, produce shoddy goods or mistreat their staff. The exclusion rules may be absolute or relative – say "any company that gains more than 10% of its revenue from tobacco, drink and gambling. Some funds apply their criteria negatively, such as a vegetarian fund completely avoiding companies involve in meat production and processing. The opposite approach looks exclusively at positive criteria – one fund supports companies who are doing the most to clean up environmental pollution and damage.
In recent years, ethical investment has become an increasingly popular trend, with investors seeking to align their values and beliefs with their investment choices. According to the Global Sustainable Investment Alliance, as of 2020, sustainable and responsible investment assets under management have grown to over $35 trillion globally, a 15% increase from 2018. Additionally, a 2020 survey by Morgan Stanley found that 85% of individual investors are interested in sustainable investing, while a 2021 survey by BlackRock found that 60% of global institutional investors are planning to increase their sustainable investments in the next year. These trends suggest that ethical investment is becoming more mainstream and that investors are increasingly recognizing the importance of environmental, social, and governance factors in their investment decisions.
According to Morningstar, the top 20 sustainable funds in the world attracted a total of $26.8 billion in net inflows in 2020. This represents a 238% increase from the previous year and suggests that investors are increasingly turning to sustainable funds as a way to align their investments with their values.
In Europe, sustainable investment funds attracted a record €233 billion ($279 billion) in net inflows in 2020, which represents a 72% increase from the previous year and sets a new record for the European sustainable funds market. Again, according to Morningstar, in the United States, sustainable funds attracted a record $51.1 billion in net inflows in 2020, which represents a 10-fold increase from the previous year and also a new record for the US sustainable funds market. In Asia, sustainable investment assets under management grew to $71.1 billion in 2020, according to the Global Sustainable Investment Alliance. This represents a 15% increase from the previous year and suggests that sustainable investing is gaining traction in the region. According to a survey by the Responsible Investment Association Australasia, responsible investment assets under management in Australia and New Zealand grew by 39% to $1.2 trillion in 2020. This represents a significant increase from the previous year and suggests that ethical investment is becoming increasingly important to investors in the region.
The growing trend of unethical practices among corporations highlights the urgent need for ethical investing as a crucial tool for promoting responsible and sustainable business practices.
With an increasing number of companies engaging in unethical practices such as environmental degradation, social injustice, and governance malpractices, the negative impact on society and the environment is becoming more severe. Ethical investing provides a way for investors to hold companies accountable for their actions by directing their capital towards businesses that prioritize ethical and sustainable practices. Failure to invest ethically only perpetuates the unethical practices of corporations and contributes to the destruction of the environment and society at large.
Investing ethically is not only morally responsible but also financially beneficial in the long run as companies with high ESG scores tend to outperform their peers.
Research has shown that companies with high ESG (Environmental, Social, and Governance) scores tend to have better financial performance and are more resilient to risks such as climate change, social unrest, and regulatory changes. For example, a study by MSCI found that companies with high ESG scores outperformed those with low scores by an average of 2.7% per year from 2007 to 2019. This suggests that investing in companies that prioritize ethical and sustainable practices can lead to better returns for investors in the long run. Moreover, ethical investing also allows investors to mitigate the risks associated with unethical practices such as lawsuits, boycotts, and reputational damage.
Ethical investing is subject to varying and subjective definitions of what constitutes "ethical" or "sustainable" practices.
The definition of what constitutes "ethical" or "sustainable" practices varies greatly among investors, making ethical investing a highly subjective issue. For example, some investors may prioritize environmental sustainability while others may prioritize social justice or good governance. As a result, ethical investing can be difficult to define and measure, which may lead to inconsistencies and a lack of clarity for investors. Additionally, some companies may engage in "greenwashing" or other tactics to appear more ethical or sustainable than they actually are, which can further muddy the waters for investors.
Just because a fund calls itself ethical or environmental does not mean it avoids all the areas you might expect. Some ethical funds invested in countries with repressive regimes, in companies that manufacture weaponry components and few avoid the ethically controversial area of intensive and factory farming.
Ethical investing is simply a matter of personal preference and does not have a significant impact on corporate behavior or financial performance.
While ethical investing may appeal to some investors based on personal values and beliefs, it does not have a significant impact on corporate behavior or financial performance. Companies are primarily focused on maximizing profits and shareholder value, and they are unlikely to change their practices based on ethical considerations alone. Furthermore, the idea that companies with high ESG scores outperform their peers is debatable, and there are many factors that can affect a company's financial performance. Therefore, ethical investing is not a serious issue and is simply a personal choice that may or may not align with an individual's investment goals and objectives.