Ashly DhaniDr Keen Mhlanga
Ethical investing, also known as socially responsible investing (SRI) or sustainable investing, refers to the practice of selecting investments based on both financial considerations and the company’s environmental, social and governance (ESG) practices.
In other words, ethical investing is an investment strategy where the investor’s ethical values (moral, religious, social) are the primary objective, along with good returns.
With suspicious and illegal investment deals on the rise, many investors are starting to insist that companies they invest in are socially responsible. It involves investing in companies or assets that align with your personal values and avoiding those that do not.
1. Environmental sustainability: Investing in companies with strong environmental track records, such as renewable energy and sustainable resource. This involves investing in companies that have a demonstrated commitment to environmental protection and sustainable practices.
The goal is to direct capital towards businesses that are actively working to mitigate their environmental impact and contribute to a more sustainable future. Companies that have a track record are those companies involved in renewable energy, energy efficiency, sustainable agriculture, waste management and pollution control.
Investors evaluate factors like a company’s carbon footprint, energy usage, water consumption, waste generation and overall environmental stewardship. Companies with a history of setting and achieving ambitious environmental targets, implementing eco-friendly technologies and minimising their ecological impact are attractive to ethical investors.
By allocating capital to these types of companies, ethical investors aim to support businesses that are making a positive difference for the environment. This can generate competitive financial returns while also contributing to environmental sustainability and helping to address pressing global challenges like climate change and resource depletion.
2. Social responsibility: Investing in companies with positive social practices, such as fair labour standard, diversity and inclusion community engagement. This involves investing in companies that demonstrate a strong commitment to social welfare and ethical business practices. The goal is to support businesses that treat their employees, customers and communities in a fair and responsible manner.
This also includes evaluating factors like a company’s labour standards, workplace diversity and inclusion, community engagement and product safety.
Companies that prioritise the well-being and rights of their workers, promote diversity and equal opportunity, and actively contribute to the communities in which they operate are attractive to ethical investors.
Investing in companies that provide fair wages, comprehensive benefits and safe working conditions for their employees. For instance, a recent study found that companies with high employee satisfaction outperformed the market by 2,3-3,8 percent annually.
A study by the Harvard Business Review found that firms with inclusive cultures were 45 percent more likely to report market share growth and 70 percent more likely to report that they had captured a new market.
By investing in companies that prioritise social responsibility, ethical investors aim to support businesses that create value for all stakeholders, not just shareholders. This can lead to both financial and societal benefits over the long term.
3. Governance: Investing in companies with transparent, accountable and ethical governance practices, such as independent boards executive compensation transparency and shareholder rights. This involves evaluating a company’s overall system of rules, practices and processes used to direct and manage its operations.
Ethical investors seek out companies with transparent, accountable and ethical governance structures that protect the interests of all stakeholders, not just shareholders. Good governance practices also include factors like independent and diverse board composition, executive compensation policies, shareholder rights and overall business ethics and compliance.
Companies that demonstrate a commitment to good governance are more likely to make decisions that create long-term, sustainable value for investors, employees and the broader community. The key example of the company with that reputation is Microsoft. Microsoft’s board of directors is composed of a majority of independent members, with diverse backgrounds and expertise.
The company has robust executive compensation policies that link pay to performance and long-term value creation. Microsoft has a shareholder-friendly governance structure, including the ability for shareholders to nominate directors and vote on key corporate decisions.
Research by the International Finance Corporation (IFC) showed that companies with independent board members and transparent executive compensation had a 15 percent higher return on assets compared to their peers.
4. Human rights: Avoiding companies involved in human rights violations or exploitation, such as child labour, forced labour and discrimination. Ethical investors carefully research and screen potential investments to ensure they are not supporting companies engaged in unethical practices that violate human rights. This includes evaluating a company’s supply chain, labour practices, and overall treatment of workers, customers, and the communities in which they operate.
An Apple company is an example of companies which avoid the violation of human rights. Apple has implemented extensive supply chain audits and worker empowerment programmes to address issues such as excessive overtime, worker safety and underage labour.
The company has also worked with NGOs and international organisations to develop industry-leading standards for responsible sourcing of minerals. According to Apple’s 2022 Supplier Responsibility Report, the company conducted over 1 100 audits in 49 countries, identifying and addressing over 800 labour and human rights violations.
By avoiding companies involved in human rights violations, ethical investors can align their investments with their values and support businesses that respect the dignity and rights of workers, customers and communities.
This can lead to both financial and societal benefits in the long run. According to a report by the International Labour Organisation (ILO), an estimated 27.6 million people were in forced labour globally as of 2021, with the private sector accounting for 86 percent of these cases.
Ethical investing strategies
1. Positive screening: Investing in companies with strong ethical track records, such as leaders in sustainability and companies with diverse boards.
2. Negative screening: Avoiding companies with poor ethical track records, such as Companies involved in tobacco or weapons production and companies with poor labour practices.
3. Impact investing: Investing in companies creating positive social or environmental impact, such as Renewable energy projects and Affordable housing initiatives.
4. ESG integration: Considering environmental, social, and governance factors in investment decisions. Climate change risk and Supply chain management are the examples.
5. Active ownership: Engaging with companies to improve their ethical practices includes Voting proxies and engaging in shareholder activism.
Ethical investing is a growing trend that offers investors the opportunity to align their investments with their personal values while potentially earning competitive financial returns. By understanding the key principles, strategies, and benefits, investors can make informed decisions about incorporating ethical investing into their portfolios.
Dr Keen Mhlanga is an investment advisor with high skills in finance. He is the executive chairperson of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
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