Investing

Ethical Investing: How to Invest Based on Your Values

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Ethical investing is a modern quandary. With pooled investment vehicles like ETFs and mutual funds including today’s top-performing companies (including those with questionable environmental and social responsibility), it can be tough to make investments that align with your values.

But when you’re investing in the stock market, you’re not just helping your nest egg grow. You’re also backing businesses. To redirect their cash toward causes they actually believe in, many investors are becoming more discerning when allocating their assets. They’re putting ethical investing front and center and making values-based investments that offer good returns and do good for the world.

So what exactly is ethical investing, and can this values-based investing approach help you do well while doing good?

Here’s what you need to know about how socially-responsible investing can help you change the world while putting extra change in your pocket.

What is ethical investing?

Ethical investing is when you choose investments that align with an ethical code you’ve set. You might choose companies with strong scores on the annual HRC Corporate Equality Index. Or, you could choose to exclude companies with poor environmental, social and governance (ESG) scores (more on that in a minute).

Also known as “socially responsible investment strategies” (SRIs) or “impact investments,” ethical investing puts you in control of where your money goes and the types of companies you’re willing to support.

Many investors still believe that values-based investing involves a financial trade-off — though many performance indicators seem to suggest otherwise. More than half of investors think prioritizing values over strict performance metrics could lead to fewer financial gains, according to a 2015 survey by Morgan Stanley.

Despite that perception, the interest in ethical investing concepts and values-based investing strategies is growing. In that same survey, 75% of individual investors said they were interested in the strategy, while 86% of millennials were.

Along with making you feel better about the companies your money is supporting, there’s an argument to be made that values-based investing is a better decision from a financial standpoint too. After all, when businesses experience values-based scandals, their stock prices often drop dramatically — which is exactly what happened as a result of Volkswagen’s emissions cheating debacle back in 2015.

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Common strategies to invest based on your values

What are the metrics these investors use to screen potential securities? Here are a few of the most common ideologies investors use to make their decisions.

Environmental, social and governance (ESG) criteria

A company’s environmental impact, social implications and governance ethics are three primary criteria by which a potential investment can be judged. How well is a given company performing as a steward of nature and ambassador for environmental sustainability? Does it support human rights and make an effort to participate in the community? How is the company run, and what are its policies toward employees and leadership structures? All of these are questions a values-based investor will ask before deciding to invest in a company’s shares.

Utilizing ESG criteria as a yardstick for potential investments gives you a good overall look at a company’s behavior. But some socially responsible investors narrow in on a more specific focus.

Socially responsible investing (SRI)

In many cases, investors are specifically interested in how a company behaves on a human and social level, both within the firm itself and within the community at large. These investors might choose stocks based on their political affiliations or policy leanings, with special attention on the following types of concerns:

  • Family values or religious beliefs: Does the company support the investor’s religious values or stance on marriage rights?
  • Labor rights: Does the company treat its employees fairly, pay a living wage, and create healthy and diverse power structures internally?
  • Diversity and civil liberties: Does the company support civil liberties and equal rights for all?

Other values-based investing metrics

Of course, the personal values investors use to judge companies are as diverse as, well, personal values. Other major ethical questions for socially conscious investors may involve environmental stewardship, animal welfare, child labor, reduction of toxic admissions and much, much more. It’s all up to what matters to you!

How to add ethical investing concepts to your portfolio

Interested in taking an ethical investing mindset to your holdings? With the vast array of stock options out there, it can be difficult to know where to start.

If you’re just diving into the wide world of investing, check out our guide for beginning investors. It’ll help you learn more about the risks and rewards of putting your money in the market and also walk you through the steps of opening a brokerage account, which you’ll need in order to choose specific stock options. You can also use a financial advisor to devise an investing strategy specific to your values.

Once you’ve opened and funded your account, you can begin researching potential investments to see how they stand up to the ethical investing standards you’ve set. If it’s a major company, simply Googling its name likely will result in a wide variety of news headlines to give you a sense of the firm’s corporate, social and environmental behaviors and positions. It’s also a good idea to look into the stock’s historical performance. (You’re still in this to make money, after all.)

If you don’t have a lot of cash to play with, another option is to consider micro-investing through a robo-advisor app like Stash. Although there are a variety of such apps to choose from, Stash in particular offers a host of ETFs that are specifically curated for those interested in valued-based investing.

The bottom line

Ethical investing concepts and value-based investing strategies offer a way to ensure that the money you put on the stock market works to improve both your personal net worth and the world at large — however you define “improvement.” Backing socially- and environmentally-conscious companies might even safeguard your investments against the pitfalls that plague companies that cut corners.

Whether you decide a socially responsible investment strategy is right for you or not, one thing’s for sure: If you want to save for retirement and other major financial goals, there are few more powerful methods than investing.

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