Investing

Investment is committing money to a commercial venture or business with the objective of getting maximum profits from the money so put in.

While the primary objective of investing is to earn more money from the money invested into a venture or entity, not all investments seem to be based on the sole motive of earning profits. Ethical investing is the latest development in industries across the world. A look into this trending form of investing.

Ethical investing

Simply put, ethical investing is the process of an individual investing in a company based on his or her personal values / value systems. Such values can be moral, ethical, religious, environmental, social, governance, sustainable and other personal values.

Instances of ethical investments:

1. Socially responsible investing (SRI):
   Investing in companies that work towards social change for good – environmental protection, gender balance and gender diversity, consumer protection, human rights protection, and good corporate governance.
   For instance, Google aims to be completely carbon free by 2030 by developing carbon free technologies. Levi Strauss, the jeans manufacturing company aims substantially reduce usage of water – a resource that is required in manufacturing its jeans. This way it aims to conserve the scarce natural resource.
2. Impact investing:
   Such impact could be positive or negative.
   Positive impact investing – investing in companies which are engaged in education, healthcare, renewable energy such as wind, solar power, cruelty free products or services.
   Negative impact (non) investing – Not investing in companies selling or dealing with products or services that have detrimental effect on people – liquor, tobacco, cigarettes, gambling, weapons, and other such products / services. Such type of investing is also called ‘moral investing’ – aligning with the moral values of the investor.
3. Environmental Social Governance (ESG) investing:
   The ESG is an indicator of a corporate’s perspective and outlook towards sustainability, environmental consciousness, social / skill development, healthcare, education, and internal governance aspects. It is used interchangeably with socially responsible investing.
4. Investing based on religious values or Faith based investing:
   Every religion has it own unique set of beliefs. People belonging to a particular religion or community will invest (or not invest) in companies in alignment with their religious beliefs. While investing in certain companies, profit or returns would not be the motive, rather the preservation of their religious belief or faith will be the deciding factor. For instance, Roman Catholics do not prefer to invest in companies engaged in stem cell research. In Islamic faith, no interest can be charged on debt. Hence Muslims general avoid investing in companies with heavy debt – interest burden. In 2009, Taurus Mutual Fund launched the Taurus Ethical Fund entirely based on the Sharia Muslim law. The Fund boasts of more than 100 Crores assets under management.
5. Investment based on political values:
   This type of investment is based on whether an individual’s preferred political party is in power. Investment in certain companies (such as weapons manufacturing) would depend upon the political ideology of a person.

Ethical investing is the blanket term used for referring to any or all the above types of investment.

Advantages of ethical investing  

1. Profit is not the only motive while investing ethically. Such investments are usually in line with the person’s personal values / value systems.
2. Investors ensure societal, social, environmental, moral development alongside profits and revenue.

Disadvantages of ethical investing

1. There is no ‘one size fits all’ approach in ethical investing. What may be favourable to one may not find favour with another person. Each persons’ value systems being different, it is a subjective issue and hence no standard performance indicator or yardstick to measure ethics of a company.
2. By eliminating companies that do not align with a person’s value systems, the choice of companies to invest becomes limited.
3. Profits may not be as desired when once bases investment decisions on personal values and not performance of the company(s). There may be limited returns with sustainability. However, there may not be guarantee of returns.

Key to investing ethically

The document(s) of any entity is key indicator of their values and performance strategy. Depending upon the type of entity, documents including but not limited to Memorandum and Articles of Association, Visions and Mission statement, Code of ethics, policy documents, financials – historical, present and projected statement(s) will help a potential investor in arriving at a decision to invest in an entity. However, it is prudent to go beyond the documentation and analyse whether the Management and the company in general adhere to the value systems as claimed in the documents.

The future of investing             

The change is for better. Technology and connectivity have made the younger generation more aware and socially, environmentally, ethically conscious of making the earth and society a better place to stay in. It is believed that investment based on personal values will increase by at least 50% in the next 2-3 years. Ethical investing seems to be the much-needed balance between returns and values.