Ethical Investing
Ethical investing is a strategy in which a trader chooses investments based on personal values and principles. Importantly, ethical trades support those industries making a positive impact, such as sustainable energy, whilst creating a monetary return. This tutorial covers the best brokers for ethical investing, the types of responsible investments you can make, plus how to start your trading journey.
The top brokers for ethical investing include CMC Markets, eToro and IG.
Top Brokers For Ethical Investing for United States
Ethical Investing Explained
Ethical investing, or socially responsible investing, is a broad term that refers to making trades based on personal or ethical values. These principles can include religious, social, environmental and political considerations. It is essentially a trading strategy that seeks to consider financial returns while bringing about a positive impact.
Swing traders can allocate capital to companies whose values and practices align with their personal beliefs. For example, you may want to invest capital in a company striving to use renewable energy. Alternatively, you could avoid purchasing stocks in companies that are involved in harmful activities such as tobacco or alcohol. It is important to remember, however, what is ‘ethical’ to one person may not be to someone else. It is a personal viewpoint.
Historical Trends
The concept of ethical investing can be traced back to the 18th century. Records show it first emerged in America by members of the Quakers who restrained supporters from spending funds on the slave trade. Religious-based investing was the main motivation in previous centuries, where services and practices that countered personal beliefs were to be avoided.
In the 20th century, ethical investing moved to more of a social view, with trading choices mirroring public and political interests. In 1971, the first ethical fund was launched in the US with the directive to avoid investments that were associated with the Vietnam War. More recently, ethical trends centre around impacts on the environment and society, particularly surrounding sustainability.
Types of Ethical Investing
Ethical investing has lots of variations. These all follow similar trends towards an aligned idea; creating positive change by investing your money with purpose. Some strategies include positive impact investments only while others simply exclude negative impact investments.
We break down some key terminology below:
Sustainable
Sustainable investments aim to generate positive social outcomes. They are essentially a combination of ethical investing (excluding organizations associated with ‘harmful’ practices) and ESG investing (recognizing companies that demonstrate good behaviours). This blend of negative and positive screening aims to capture the best of both worlds and, some argue, is the most ethical approach.
Impact
Impact investments are ventures that generate positive social and environmental impressions. This strategy focuses on the ‘doing good’ vs the ESG approach which follows more stringent investing criteria. Capital can be used to address pressing challenges in global sectors such as housing, healthcare, conservation and sustainable agriculture. The concept involves looking at an organization’s pledge to corporate social responsibility.
ESG
ESG stands for Environmental, Social and Governance. It is about trading in companies that strive to make a positive impact on the world. By considering these factors, swing traders can achieve a more holistic view of the organizations they invest in, which can help identify opportunities and minimize risks. According to Morningstar, it is reported that funds that follow ESG principles have a total value of over $1 trillion.
The three core elements can be broken down into:
- Environment – What kind of impact does the organization have on the environment? This component addresses how a company impacts the planet through climate change policies, waste disposal, carbon footprint, renewable energy, water usage and more.
- Social – This is focussed on stakeholder relations and issues affecting employees, customers, suppliers and the local community. Examples include commitment to employee development, gender equality, diversity and inclusion, ethical supply chains, and consumer protection schemes.
- Governance – This component refers to leadership, business ethics and board independence. Topics can include transparency of shareholder information, history of lawsuits, relationships with regulatory bodies and executive compensation.
SRI
Socially Responsible Investing (SRI) strategies are focussed on the nature of business practices. They seek to consider both financial returns and social good. The concept involves disregarding trading opportunities in companies that are involved in processing or promoting harmful activities or products such as gambling, tobacco and alcohol. Traders can instead seek out organizations that engage in alternative and sustainable energy sources, for example.
It follows a similar approach to the ESG trading elements, as socially responsible investments tend to simulate the political and social climate of the time. Examples include investing in companies with a track record of community help and local project support.
How to Invest in Ethical Assets
The best brokers for ethical investing provide trading opportunities in companies with strong pledges towards environmental and social obligations. It is worth doing company research before opening a live trading account. Platforms often don’t subsection stock options based on ethical commitments such as renewable energy usage and carbon footprint reduction plans.
With that said, popular ethical stocks in 2024 include United Natural Foods and Weyerhaeuser. United Natural Foods operates farming practices without the use of harmful pesticides, producing more sustainable products. The company also has many other ethical initiatives such as investing in renewable energy and philanthropic activities.
Sustainable share baskets can be a good way to get started with ethical investments. These are essentially mini portfolios of stocks built around specific themes. CMC Markets, for example, creates exclusive baskets based on market trends. ETFs and actively managed mutual funds can also provide greater exposure to ethical companies vs stocks that only offer access to a single asset.
An ethical ETF broker will typically filter out those companies in an index that are involved in certain activities, such as weapons and tobacco. This can provide several benefits, including lower trading costs and diversification. On the downside, they may not be suitable for new investors due to their risks and complexity.
How to Start Investing Ethically
There are a few factors to consider before starting your ethical investment journey:
1. Understand Your Values
The first step to begin your trading journey is to pinpoint your personal values towards ethical measures. You may already have some strong views towards certain practices such as companies that are working with renewable energy sources or sustainable waste management, for example.
2. Choose a Fund or Company
Do your research to understand what companies or specific fund baskets are doing to meet your criteria. Be open-minded here, you may not find an organization or fund that ticks all the boxes. Instead, identify the funds and services that meet a good proportion of your ethical expectations while also meeting your financial objectives.
3. Find a Platform
It’s time to invest your money. Find a broker that offers access to the shares or funds that you are interested in. The best brokers for ethical trading may also provide ready-made portfolios. Interactive Brokers, for example, offers tailor-made sustainable investing portfolios using an ESG scoring model. Simply select the values important to you to develop a conscious trading plan.
4. Create a Trading Plan
It is also important to think about how ethical investing will be part of your wider trading plan. Think about your capacity for risk and timescales to trade. Although often a longer-term investment, it is worth monitoring your funds regularly and keeping an eye on the latest news in your invested shares. Changes to a company’s stance on sustainable practices can influence prices significantly.
Are They Really Ethical?
The top brokers for ethical investing in 2024 apply ‘negative screening’ to remove those assets associated with damaging practices. Trading platforms will also promote swing trading options dedicated to making positive transformations through their environmental, social and governance actions. We outline how this works below:
- Positive Screening – The process of identifying organizations that score highly on social, environmental and governance (ESG) factors relative to peer companies. Positive screening is commonly used for building best-in-class funds that select companies with superior ESG scores.
- Negative Screening – Recognizing companies that offer investment opportunities not aligned to many personal values and morals. This concept is used by investors to avoid investing in organizations dealing in immoral activities such as adult entertainment, gambling and poor human rights
Importantly, it can be misleading just to focus on the positives. There is a danger that companies may glorify these actions without highlighting some of their harmful aspects. This is known as greenwashing. This is the concept of conveying a false impression or providing misleading information about how a company follows environmentally friendly practices.
Pros of Ethical Investing
- Invest According To Personal Values – Brokers allow swing trading clients to invest in firms that align to individual core values. Ethical investing allows you to choose trading positions based on your moral principles. The top ethical brokers in the market make this even easier via portfolio creation tools
- Incentive For Change – As traders begin to focus their attention on responsible organizations, other businesses will strive to improve their ethical practices to attract funding. Over time, global companies will become more and more sustainable which can only be beneficial for the environment and wider social causes
- Feel Good – Aligning investments to your personal values can make you feel good. If a company shares your personal principles and delivers ethically responsible projects, you could benefit both financially and emotionally. Using your capital to not only do good in the world but to make a profit can be highly rewarding
- De-Risk Portfolios – Investing in shares from an ethically focussed company may provide a more stable trading outlook. Companies that place an emphasis on environmental, social and governance issues are important for long-term prosperity. Disregarding some types of investments may also reduce your exposure to price volatility. For example, excluding non-renewable energy such as oil from your trading portfolio may reduce the likelihood of significant price fluctuations from geopolitical influences
Cons of Ethical Investing
- Higher Fees – Due to additional filters associated with ethical investing, fees are often higher. These charges and transaction costs can eat away at profits, particularly if your swing trading strategy involves shorter-term investments
- Research Required – Ethical investing requires careful consideration to choose the right companies and funds that meet your personal views and values. Choosing which ethical investments to make is essentially time-consuming. As a result, it might be worth utilizing a broker’s tools to create bespoke fund portfolios
- Greenwashing – Many companies claim to be socially responsible, however, in the full sense they may fall short. Greenwashing involves marketing stunts and PR activities specifically for the public. Do your research to understand how exactly these claims are being met and how they will be sustained in the long-term
- Limited Opportunities – When your attention is exclusively on ethically responsible investing, you could forego other investment opportunities, offering better returns. Choosing an investment based on ethical practices does not determine the investment’s overall performance
Bottom Line on Ethical Investing
Implementing an ethical viewpoint into your investing strategy can be rewarding. Generating profits while ‘doing the right thing’ is a growing trend and can create a more sustainable outlook within your portfolio. But remember, no company shares or funds will fit your requirements exactly, so understand which are the most important factors to you. The research can be time-consuming and don’t be absorbed by greenwashing claims. Utilize investment fund baskets or platform tools to get started quickly.
FAQ
What Is Ethical Investing?
Ethical investments have a positive impact on the world while also aiming to generate financial returns. It means you can attempt to make a profit without foregoing your social, environmental, or moral principles. Areas of focus can include climate change, animal testing, gambling and tobacco.
Is Ethical Investing More Profitable?
Unfortunately, you do not necessarily get greater profit security through ethical investing vs other trading strategies. However, companies that recognize the importance of environmental, social and governance issues can achieve long-term prosperity. Disregarding some types of investments through negative screening and research may also reduce your exposure to price volatility.
What Are Some Of The Best Brokers For Ethical Investing?
Some of the top global brokers for ethical investing include CMC Markets, eToro and IG. The best trading platforms provide portfolio recommendations based on your personal values, principles and morals.
How Do I Choose The Best Broker For Ethical Investing?
There are many factors to consider when choosing the right broker for your ethical trading needs. Review regulatory authorization, fees, minimum deposit requirements, instruments, plus customer support.
What Is Negative Screening?
Negative screening involves finding companies or services that score poorly on environmental, social and governance (ESG) factors relative to others. Negative screens can then exclude certain securities when building a swing trading portfolio.