What Is Ethical Investing?

There are many aspects to keep in mind when choosing the stocks to buy, the companies to invest in. Most of these have to do with their long-term growth potential and expected returns. Is there room for ethics in investing, though? Are some activities or shares too “dirty” for some, even though they have the potential to generate considerable income?

Ethical investing

There is no single definition of which investment is ethical and which isn’t – it all depends on the views of the person doing it. In general, it means filtering all decisions through the person’s principles when choosing the securities invested in. 

The term is often used interchangeably with “socially conscious investing” even though it is a much more personal, subjective approach, it has more to do with the person’s own morals than with the betterment of society as a whole.

Ethical investing usually means staying clear of sin stocks and directing capital toward companies and industries that align with the investor’s ethical guidelines.

“Sin” stocks

There are companies that make money off activities that are seen as destructive for individuals, society or the environment. These include businesses like gambling, firearms, alcohol, sometimes marijuana, smoking and, for some, pharmaceuticals, fossil fuels, and mining. 

What is considered “sinful” differ from investor to investor. For some, pumping money into a Las Vegas resort teaching patrons how to become a high roller is perfectly fine, while for others, investing in pharma is out of the question, considering that some pharmaceutical companies (especially in the US) are seen as preying on the most vulnerable – think of “Pharma Bro” Martin Shkreli who went down in history as the guy who raised the price of a life-saving drug 56-fold. 

The problem with these “sin” stocks is that they tend to be stable and generate considerable profits. Gambling, firearms, alcohol, and tobacco are among the most recession-proof, considering that demand for their products is constant. And, from a purely business point of view, they are perfectly sound.

Investing in an ethical way

First and foremost, reading a company’s mission statement is not enough to decide whether it deserves to be invested in or not. A mission statement is just text – actions, in turn, are worth more than the proverbial thousand words. 

Amazon, for example, is the biggest online retailer in the world with massive warehouses, hundreds of thousands of employees, and profits through the roof. Is investing in it ethical? Well, it depends on how you see its repeated disregard for the health and safety of their warehouse employees, their tax avoidance, and the allegations about unfairly copying their rivals’ products, turning them into Amazon Essentials. How about Nestlé, the company that was repeatedly accused of leaving river beds bone dry while selling bottled water worth billions each year, all this while its CEO is an advocate for water privatization?

Ethical investing is a multi-layered, complicated matter that needs a lot of digging. The payoff is, in turn, peace of mind, something money can’t buy.

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