What are the ethical issues related to investing in stocks?

When it comes to investing, what are some of the ethical dilemmas that you face?
What are the ethical issues related to investing in stocks?
Reading time: 7 mins

Investing is a great tool to help give your money more potential, but it isn’t without some ethical considerations.

Something that’s important to note is that what you deem to be ‘ethical’ is often quite personal. It’s a view that has been shaped by your life experiences, religion, upbringing, and a dozen other factors. While you may share similar concerns with a wide range of people, you may address them differently. For example, most people believe we need to reduce carbon emissions, but some will try to do their part by adopting a vegan diet whereas others may choose the less drastic vegetarian route. There’ll also be people who keep eating meat but will try not to drive cars, or favour staycations over holidays abroad. While these approaches are all very different none of them are wrong as they are all trying to achieve the same goal: fighting climate change

The same can be said of investing, and that’s why it’s worth knowing some of the issues that are considered when we build an Ethical Investment Plan.

Why do ethics matter?
Pretty much everything you do in life is guided by a set of ethics – from obeying the laws to how you treat others – so surely the way you approach investing shouldn’t be any different. Taking an ethical approach to investing could be a good way for you to feel connected to your investments. Also, it’s a nice feeling to know that ethical investing not only aims to deliver a return but does so by supporting companies that are trying to have a positive impact on the environment and/or society.

As an ethical approach is quite subjective, there are a number of different issues that you, personally, may have to address to see how they sit with you. Here are just a few examples of the ethical issues you may face when investing.

Winners and losers
If you want to take a completely black and white approach to investing, then every time anyone makes a profit, someone else has lost out. For example, if someone bought a share from a company in their initial public offering (which is when a company first puts themselves for sale on the stock market) for £10, and then sold it for £12 but it’s now worth £20 – then they’ve lost out on £8.

This is a fundamental of investing, so it doesn’t matter how ethical anything else is, if your morals don’t like the idea of someone else losing money then investing might not be for you.

Healthy Competition
On the other side of things, if a company has a monopoly on a market or industry, they could be forcing other businesses out due to low prices, high efficiency, or big advertising budgets. When this happens, it’s very difficult for other businesses to compete.

Some investors may consider this unethical practice and choose to avoid purchasing shares in that company.

Environmental Responsibility
This is one of the more common ethical considerations when investing, by making sure that the companies you’re invested in are doing their bit to improve the environment. Climate change has been thrown to the forefront of people’s minds in recent years, making it everyone’s responsibility to do their bit for the environment.

With companies having a much greater impact due to the intensity and volume of their carbon footprint, there has been an increase in pressure from ethical investors for companies to take responsibility and lower their emissions. We’ve even seen investment giants, like Chris Hohn, take an aggressive stance and threaten to oust their boards or dump their shares if they don’t reduce their emissions or report on their carbon footprint.1

Sin Stocks
A common ethical dilemma is investing in companies who are considered ‘sinful’. This tends to include companies that are associated with things like gambling, pornography, weapons, alcohol, and tobacco. But even this breakdown is subjective, as a clean sweep to remove any business that fits into this category could also remove companies that you may want to support. Similarly, excluding an entire industry, or companies who profit from a ‘sinful’ industry, means you could miss out on companies who are taking positive steps to educate the public, reduce environmental impact and improve their practices.

If you buy an ethical fund – which is like a hamper full of all sorts of different kinds of investments – then most of them will automatically exclude these industries, however if you are managing your investments yourself then you could do more research around individual companies in order to better align to your ethics.

Religion
For millions of people around the world, religion is a guiding principal for how to live their best lives, so it’s only natural that this guidance seeps into the world of investing. For example, you can invest in accordance to Islamic law, which remove fixed income investments and prohibits the investment of businesses who profit off things like debt, alcohol, tobacco, gambling, pork, weapons, and more. Jewish investment portfolios on the other hand, typically have a strong focus around diversification and socially responsible investing.

If you’re religious, and want to align your investments, then there are a number of resources online – many are founded by religious groups – to help guide your decision making and offer help and support.

Socially conscious
Another thing that many investors consider is the societal impact, looking to invest in companies who put people first and aim to have a positive impact on society. In a recent report, it was found that being trusted by society is something that 78% of business leaders recognise is crucial to their organisations’ success[2].

This can take a range of different approaches, from paying their staff a living wage and implementing equal rights policies, to adhering to Fair Trade standards and directly helping to benefit customer’s lives either through a service or by charitable work.

Does ethical investing work?
There are many layers to this question – does it work in that you are able to invest in companies that have been screened and considered ethical? Yes, and what’s more, you could do this using actively managed funds or by purchasing investments yourself.

But perhaps the bigger question is, does ethical investing promote better business practice? After all, if you’re aiming to invest for a better future, you want your money to have a big an impact as possible. Well the answer to this is still being discovered, but there have already been a number of success stories – including early in 2020, when BlackRock, the world’s largest investor, joined a pressure group calling for the polluting companies to reduce their emissions.[3]  This move came as the result of pressure from investment activists arguing that BlackRock should use its shareholder power to push an ethical agenda.

How do I invest ethically?
Many of you may wonder how to invest ethically. Here's how you could start. You could sit down and do a lot of research on companies, look into their sustainable development goals, their annual reports, their mission statements, their performance results, and make your decision from there. Or, you could trust an online investment company, like Wealthify, to do all of this work on your behalf and benefit from actively managed ethical investments.

What’s more, you can invest ethically without it having to cost the earth thanks to our low management fees, and small starting amounts, meaning that becoming an ethical investor is now easier than ever!

 

References:

1 https://www.bloomberg.com/news/articles/2020-01-22/the-world-s-most-profitable-hedge-fund-is-now-a-climate-radical

2 https://www.fujitsu.com/global/themes/co-creation/success-report/

3 https://www.theguardian.com/environment/2020/jan/09/blackrock-joins-pressure-group-taking-on-biggest-polluters

 

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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