How To Invest Ethically
Written by
John Csiszar
Edited by
Gary Dudak
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Ethical investing is a way to “vote with your money,” ensuring that your values and your investment principles are aligned. Rather than buying stocks simply with a profit motive, ethical investors screen out certain companies that, in their opinion, operate in an immoral or unscrupulous manner.
This is often easier said than done, however. After all, the main goal of most corporate boards is to generate profits for shareholders, and this quest for growing earnings can sometimes lead even the best of companies into inappropriate situations. It also eliminates many common investments right off the bat, such as the commonly recommended S&P 500 index.
Of course, there are alternative options, such as the S&P 500 Environmental & Socially Responsible Index. But you may have to do some extra legwork to find investments that meet your own personal ethical screens. Here are some suggestions to push you in the right direction.
Avoid Vice Stocks
One of the easiest ways to invest ethically is to avoid buying stocks in so-called “vice industries.” Vice industries typically include alcohol, gambling, weapons, tobacco or drugs. Note that you might have to do some research to define which companies are operating in the so-called “vice” industries.
For example, PepsiCo is generally regarded as a simple beverage company, particularly in the soda category. However, it has recently expanded into alcoholic beverages via the production of “Hard Mountain Dew,” which contains 5% ABV, in partnership with the Boston Beer Company.
Don’t Buy Stocks in Companies That Oppose Your Values
In addition to avoiding vice industries and selecting companies with high ESG grades, you may have specific ethical concerns that can help direct your investments as well.
For example, if you’re an animal rights activist, you might want to avoid investing in stocks that produce animal products, from food businesses to certain cosmetics companies. If you’re concerned about climate change, you might refrain from buying oil companies or other industries that are often identified as unfriendly to the environment, such as airlines and cruise companies.
Endorse ESG Companies
In recent years, environmental, social and governance standards have been applied to various companies to help investors determine how responsibly they operate.
Environmental criteria screen companies for how well they manage and execute policies related to climate change and other environmental factors. Social standards refer to how a company interacts with people, from employees, suppliers and customers to the communities in which it operates. Governance considers such factors as executive pay, internal controls, shareholder rights and leadership issues.
Companies that rank highly in all of these ESG categories can be considered for purchase by an ethical investor.
Select Mutual Funds
As ethical investing has gotten a real foothold in the past few decades, literally hundreds of mutual funds have sprung up to service this growing market, in addition to the S&P 500 Environmental & Socially Responsible Index mentioned above.
Calvert, Parnassus and Pax World were among the first offering socially responsible funds, but now there’s a broad range of prominent companies to choose from, including Neuberger Berman, PIMCO and TIAA-CREF.
Hiring a professional manager to make your ethical and ESG choices for you can eliminate a lot of the leg work on your part.
Keep Your Banking Local
Small, local banks – particularly credit unions – are known for prioritizing the needs of their communities rather than overreaching for profit.
Local banks and credit unions can be easier to analyze in terms of who they do business with and where their profit comes from. While banking with a giant, international financial institution may offer a broader product line, and perhaps even a higher level of convenience, it’s also likely to be less personalized.
Historically speaking, it’s also more likely to be hit with a fine for improper conduct, as so many major banks have. In fact, in 2022 alone, the list of banks getting hit with major fines read like a who’s who list in American finance, from Bank of America and Citigroup to Goldman Sachs and Morgan Stanley. Wells Fargo, Chase and others have found themselves in the crosshairs of regulators in past years as well.
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