How to make sure your investments are ethical

Socially conscious investors are increasingly drawn towards ESG funds, where environmental, social and governance factors are used to measure the sustainability and ethical impact of an investment. But it can involve some tough choices…

The first step is to figure out what issues you feel strongly about so that you can develop a general social policy. This will help you quickly rule out which businesses do not meet your standards.

The American advisory firm Horizons Sustainable Financial Services, for example, asks new clients to complete a “financial values” worksheet and a social policy questionnaire (both of which are available online). Basic screens include firearms, animal welfare, and fossil fuels.

Finding potential investments that align with your values gets harder the deeper you look. Without realizing it, you could end up opting for a tech firm that wastes vast amounts of electricity, or a socially conscious fashion retailer whose clothes don’t last very long.

Rather than avoid entire industries, it’s becoming more common to use “positive screening” – picking the most socially conscious investments in an otherwise questionable industry. This is a little like buying the nicest home in an undesirable neighborhood.

Viewed another way, investing in the best of a bad bunch allows investors to retain some leverage over businesses – allowing the possibility of pushing them towards more socially conscious policies.

When you've finally settled on what you will and won't invest in, the next step is deciding how i.e. choosing between active management (a portfolio handpicked by a fund manager, which tends to cost more) or passive management (which may involve the tracking of an index).

Another important step is figuring out what kind of experience your fund manager has in picking ethical stocks in line with your values. Given that the concept of ESG funds is still relatively new, few will have much of a track record in it.

The good news? More and more financial services companies have begun providing their own guides, proprietary rating systems, and model portfolios. But consider starting small and keep in mind that no company is perfect, so trade-offs will be necessary.

Bottom line: It could be argued that the return on ESG funds is still relatively inferior, but financial returns aren’t the only measure of a valuable portfolio. If you’re determined to make the world better, putting your social values into practice can be its own reward.