Ethical Investing: Can You Make Money From It?

Ethical investing is an investment strategy where you apply some moral values about what you believe to be right or wrong into your financial decisions. 

Socially Responsible Investing (SRI), Corporate Social Responsibility (CSR), Environmental Social Governance (ESG). Throw in terms like impact investing, social investing, green investing – they are all part of the “ethical investing jargon”. But what does it all mean and can you actually grow your money through ethical investing?

Most investors start by screening companies they are uncomfortable with out of their portfolios, so-called “negative screening”. These would typically be companies which make their money producing nuclear weapons (or weapons period), tobacco and alcohol products, animal furs, pesticides or which provide gambling or violent and/or indecent entertainment services. These are the so-called “sin stocks”. Lately, with the global warming awareness gaining traction, the negative screening list for many has come to include companies involved in fossil fuels like coal, oil and natural gas as well as other extractive activities such as logging and mining. 

Types of ethical investment 

Instead, an ethical investor would try to actively screen in companies from themes that he or she likes. These themes could be from environmental sectors such as clean energy, environmental services, water management, organic farming, meat-less foods or from social endeavours, for example companies involved in health, quality of life services, safety or technological solutions. 

Impact investing is a sub-segment of ethical investing where the angel investor is willing to take on more risk with his capital to help a start-up company trying to improve the environment or human living conditions, even at the expense of a large guaranteed pay-back.     

The screening would mainly be applied to the company’s shares, but could also include corporate bonds and other investment vehicles. To reduce the risk of investing in individual companies, an ethical investor would look for collective investment products such as mutual funds and exchange traded funds. 

Do you research before ESG investing?

If you are shopping for an ethical fund, most of the large fund providers offer one or more of such choices to investors; just make sure you “look under the hood” and check the fund out online in detail and find out exactly what is in it before you sign on the dotted line or click the “buy” button. Even if a fund is called something with “ESG” (Environmental, Social and Governance) Investing, be aware that this concept is fairly broad and not very well defined at all. Even companies you might not like would often claim to be “sustainable”. Another name for ESG Investing is called “SRI” (Socially Responsible Investment). 

Famously, The Volkswagen Group put out a stellar sustainability report in 2014, praising their own environmental record – the year before the company was exposed criminally cheating on exactly those environmental standards – by knowingly underreporting on 11 million diesel vehicles’ polluting emissions by as much as 40 times.   

Can you make money doing good? 

So, can you make money doing good? Yes, the numbers say that you can, provided you apply fundamental analysis to your investment options, the same way you would in any other capital management exercise. Since ethical investment strategies are catching on, especially among large institutional investors governed by management committees, there are now indications that SRI/ESG investing might actually be more profitable. The MSCI World SRI Index has consistently been outperforming the broader MSCI World index during the last 10 years, and the gap between the two seems to be widening. This has attracted a new breed of ethical investors: Those who analyse the markets and conclude that ethical SRI investing might be not just more ethical, it might actually make you more money!      

In my view, ethical investing is not a binary choice between good or bad, it’s not about an “if you are not with us, you are against us” sort of scenario. Ethics don’t work like that. Ethical investing is about considering your values before you lend out your cash, about feeling good as well as doing good. If you don’t want the world to go to hell, maybe don’t help out companies about to wreck it. There are plenty of good companies out there, doing constructive and positive things, where you can put your capital to work. 

Conclusion

If you really believe that the best way to get rich is to participate in the so-called ‘race for that is left’ (of our natural resources …), alternatively you can work or invest for a while in the extractive economy. And then, as soon as you can, you retire and use your wealth to help out the world: Become a do-gooder, a nature volunteer and/or a philanthropist. This strategy has worked for many people I know.  

Inspired by his advice? Watch Morten Strange talk about achieving early retirement in an exclusive interview with SingSaver.

Read these next:
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Retirement Age: What’s The “Correct” Age to Retire in Singapore?
Have a More Comfortable Retirement Through Tax Optimisation: SRS
3 Myths About Retirement Planning in Singapore (And Why They’re Wrong)

By Morten Strange
Morten Strange is a Singapore-based financial analyst and author of The Ethical Investor’s Handbook (Marshall Cavendish, 2018). He retired at the age of 33 and has spent the last 30 years living on passive income from his various investments. This is his story.