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6 examples of ethical investing

Blog
29 September 2022
6 examples of ethical investing

Corporate responsibility is a critical value. More and more customers and shareholders are looking at this aspect when deciding whether to engage or collaborate with a company. For this reason, many companies have begun to embrace it. However, not all of them make a real commitment to society but use it merely as an advertising gimmick. Fortunately, there are several examples of ethical investing that help investors differentiate one from another.

In just a couple of decades, the world has witnessed a sea change. In the past, little importance was attached to the positive or negative externalities of organizations. As long as they produced profits for their shareholders, all other factors were irrelevant. Only the economic aspect was taken into account.

There were already voices critical of this system, but they were very much in the minority. Gradually, however, they grew. Protests against companies with bad practices intensified. The carte blanche they enjoyed was about to expire, as they began to be targeted.

Responsible organizations, on the other hand, were being applauded. Then business leaders saw an opportunity. Incorporating ethics as a hallmark could be of great help in captivating new customers. Soon, it became the motto of many companies and flooded thousands of advertising campaigns. But this was not always accompanied by action. It was a mere smokescreen, a facade. Many of these firms did not even have a corporate responsibility strategy.

Ethics became a trend. And this scenario raises a problem: Is it possible to distinguish the companies that do strive to improve society and care for the planet? These six examples of ethical investing guide savers in the search for organizations that do subscribe to a genuine commitment, which is reflected in their actions, avoiding empty rhetoric.

1. Discarding companies with unethical activities

One of the examples of ethical investing concerns the business model and the actions carried out by the company. But first, it is necessary to ask a series of questions: What industry does it belong to? What products does it manufacture? What services does it offer? And what is its impact on society?

If a company is dedicated, for example, to the manufacture and sale of weapons, it is directly ruled out. No investment in it will be considered ethical investing, since the result of its actions is the loss of people's lives.

Other sectors are also very harmful, as they damage health or create addictions among their consumers. This category includes tobacco, alcohol, or businesses related to gambling.

But it is important to focus not only on business activities but also on processes. If a company dumps its waste into the sea, does not limit its carbon emissions, or neglects issues such as recycling, it is collaborating in the destruction of the ecosystem. Consequently, environmentally concerned individuals should not finance it.

2. Be guided by international standards and treaties

Although there is no universal manual of ethics, a multitude of agreements has been signed between most countries in the world. These treaties, which are international in scope, establish a series of rights and duties that apply to all human beings.

The Universal Declaration of Human Rights is the most important of these treaties. The United Nations Convention against Corruption and the Declaration of the International Labor Organization also stand out. This set of covenants provides a series of guidelines that should be followed by all companies.

Unfortunately, there are still companies that violate its articles and exploit their workers. Investors who wish to use their money ethically should avoid dealing with them.

Today, the Sustainable Development Goals have taken on major importance. Defined by the UN, they set out a fair and sustainable vision for the future, articulated in seventeen points. Many companies have signed up to them, and publicly indicate the points to which they contribute, such as the reduction of inequalities, economic growth, and climate action. This can help investors to focus on the areas where they most want to contribute.

3. Selecting the best-rated organizations

Some entities are dedicated to closely studying companies to audit them. They analyze different aspects, such as their contribution to society and the environment, and then publish a ranking. The higher a company is on these lists, the greater its commitment to these causes.

In short, they are indexes that show investors the organizations with the best practices in the market. They give them a score based on their policies and environmental, social, and good governance variables. Thus, savers can check which are the best rated.

This system is known as best in class, as it consists of selecting the companies with the highest ratings. However, to be effective, the rankings must be drawn up by independent firms that evaluate each company objectively. In this way, the investor will be able to trust them unreservedly. This is undoubtedly one of the best examples of ethical investing.

4. Taking ESG criteria into account

The ESG model provides a very accurate measure of how responsible an organization is. It groups together three factors: environmental, social, and good governance. In an optimal scenario, companies should excel in all three areas.

To begin with, there are environmental variables. These refer to the repercussions that a company's activity generates on its surroundings and the policies it has implemented to protect the environment. Reducing energy consumption to pursue efficiency, recycling waste, and making the most of scarce resources such as water are clear examples of good environmental management.

On the other hand, there are social criteria, i.e. how the organization takes care of its human capital. People must be at the center of companies. An outstanding firm in this field will have flexible work-life balance protocols, employee training programs to enhance talent, and policies that ensure gender equality.

Finally, there is everything related to good governance. This aspect refers to how the company is organized and how power is exercised within it. If it strives to comply with regulations, has measures in place to improve transparency, and takes care to protect the interests of shareholders, it is a sign of excellent management.

5. Investing in specific sectors or themes

Another of the most common examples of ethical investing is the financing of those sectors that most concern the saver. Not all people share the same interests: some are more committed to the environment and others to social equality. The former are more likely to allocate their money to financially support entities that fight for the preservation of species, while the latter are more likely to support initiatives that promote inclusion.

This implies a higher degree of knowledge on the part of the investor, as it means that they are interested in promoting a specific issue.

Organizations themselves can also invest thematically within their sectors. For example, employees working in water-intensive companies can finance small businesses that provide access to clean water to people who do not have easy access to this resource.

In this context, the Sustainable Development Goals are again very helpful, as they are an indicator of all those issues to which organizations are committed, and they guide the investor's choice.

6. Investing for impact

The last of the examples of ethical investing is impact investing, an increasingly popular alternative. In this case, savers decide to finance certain projects directly, convinced of their potential to impact communities and generate positive consequences.

It is one of the most profitable options, and one of the most rewarding for investors, as they can follow their progress closely. There are many small companies building soup kitchens, developing mechanisms to clean up the oceans, or fighting to end animal experimentation, among other causes. All of them need resources to grow, so they turn to alternative financing channels.

In Spain, this type of investing is already being consolidated. According to the report Impact investment in Spain in 2021, published by SpainNAB, last year it moved more than 2,398 million euros in assets. This represents a growth of 12% over the previous year. And the forecasts for 2022 are also positive, as most entities expect to continue growing at a good pace.

Economic profit, a central issue

These examples of ethical investing help to find companies that are truly committed to the defense of just causes and the transformation of society. And they are not mutually incompatible. On the contrary, it is best to combine the different strategies to invest money wisely.

Although their main goal is to generate a positive impact, these organizations do not neglect the economic aspect. Profitability is another of their objectives. In this line, they strive to generate income to satisfy all investors who trust them.

At the end of the day, the individual does not donate but seeks a return on the money. As in traditional investing systems, he earns a profit through the interest on the loan, agreed upon by both parties. But, instead of resorting to conventional channels, he decides to create a better world in the process.

This is precisely the main pillar of ethical investing, which combines economic profit with social and environmental benefit. The combination of these two aspects is what differentiates it from the rest and gives it such immense value.

Ethical investing platforms are emerging to support these initiatives. Inversa is one of them. Through its crowdfactoring system, it allows savers to finance company invoices online. In this way, it promotes the real economy and gives value to those projects that seek to transform their communities and improve the world.

Inversa Team
Inversa Team

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