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Improving society while making a profit: what is ethical investing?

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26 September 2022
Improving society while making a profit: what is ethical investing?

Investing is no longer reserved for the wealthy. Today, even the most modest savers devote part of their capital to financing companies. Both share the same objective: to obtain an economic benefit that helps them to increase their wealth. And to achieve this, they have an infinite number of alternatives at their disposal. But those most concerned with social and environmental welfare should understand ethical investment.

Finance has a substantial impact on the world. After all, it can contribute to the improvement or deterioration of society and the environment. If you invest in companies with bad practices that pollute their environment or promote inequality, you are collaborating in perpetuating these scourges.

However, ethical criteria are increasingly taking precedence when it comes to investing. Some individuals already place this aspect as one of their main concerns instead of putting mere economic benefit first. Corruption and environmental damage are increasingly being punished. And no matter how profitable an organization may be, it will lose a considerable portion of its investors if it engages in these behaviors.

The number of investors inclined to support responsible companies is constantly growing. They are looking for sustainable projects focused on protecting the planet and equal opportunities. Without solid financial support, many of them will not be able to get off the ground, and their market launch will fail.

This is where alternative financing channels come into play, providing a platform for these initiatives, disseminating their activity and putting them in contact with potential investors.

But what is ethical investing, and why does this model play a transcendental role in the transformation of society?

What is ethical investing?

Economic profit and social transformation are not incompatible concepts. The two can and should go hand in hand. However, traditional banking institutions did not share this mentality. When deciding whether to finance a company, they only prioritized its profitability, ignoring all other issues.

In response to this situation, ethical investing was born, which is not limited to considering the economic aspect but combines all the variables. This new form of investment brings together all those finances that support projects that strive to create a better world without neglecting profit. In this way, the money the investor contributes manages to generate positive environmental changes. And both parties make a profit.

The main objective of these organizations is not to make as much profit as possible. However, they do have a profit motive. If they are not profitable, they would not be able to survive, which would prevent them from continuing to champion their causes. For this reason, they will always try to ensure their economic viability.

There are other channels available to savers who wish to invest their wealth. But most of these alternatives are more speculative. And while the financial gain may be more significant in some cases, the gain to society through ethical investing is invaluable.

The opportunity offered by this model

Having understood what ethical investment is, it is essential to understand how this phenomenon has contributed to the democratization of the financial world. In the past, banks had a monopoly on granting credit. As a result, all nascent projects in need of financing were forced to turn to them, as this was practically the only way to obtain resources. If they did not give the go-ahead, whether due to economic viability or any other factor, most businesses said goodbye to their only chance of financing.

This meant that many great ideas failed to thrive for a lack of resources, slowing social progress and perpetuating injustices.

Fortunately, social investment made a splash, ready to turn this situation around. Its emergence meant the creation of channels that allowed initiatives to access resources. They were thus able to incorporate and grow in the market formally. In a scenario that discriminated against projects with ethical aims, this meant a significant improvement in the distribution of opportunities.

This model also had advantages for individuals wishing to invest their money. Previously, their options were much narrower, so most were limited to buying and selling shares on the stock market. But with the birth of ethical investing, those who wanted to make a financial profit while contributing to society had their need met.

Both sides demanded this investment model. And the traditional banking system ignored their demands.

Improving society while making a profit: what is ethical investing?

How to identify ethical companies

Although many organizations carry the corporate responsibility flag, not all have a real commitment to their environment. Sometimes, it is simply an advertising strategy, a discourse not accompanied by real actions. For this reason, it is important to understand what ethical investing is and to have mechanisms in place to distinguish truly responsible companies.

It is essential to exclude companies with harmful activities, i.e., those whose products or services are harmful to human beings or threaten their health. Guidance from international agreements can also help. Organizations that violate treaties such as the Universal Declaration of Human Rights or fail to respect the basic rights of their workers should be excluded from the equation.

Using indexes drawn up by independent entities can also help to identify the most highly rated companies. These firms analyze the practices of companies and draw up a ranking by sector, which is very useful in guiding investors' decisions. Similarly, looking at their ESG criteria (environmental, social and governance) is helpful, evaluating their actions within each aspect. If it is concerned about not polluting its environment, promoting equality and facilitating its employees' work-life balance, it will be a good choice.

Thematic investing is a popular resource in which the saver allocates his money to a specific sector. For example, organizations that subscribe to the Sustainable Development Goals set by the UN tell the investor what causes they support. If these align with his interests, he can direct his investment in that direction.

Finally, there is impact investing, which is gaining more and more followers. In this modality, the saver directly finances the initiatives they wish to support. And they have the opportunity to see firsthand how their capital benefits the community or the environment.

The crowdfactoring platform developed by Inversa

The number of ethical investing platforms is growing daily in response to society's growing interest in these alternatives. In this context, factoring is emerging as a very attractive option. According to the Spanish Factoring Association, this modality experienced a growth of 11.5% in 2021.

Through this method, entities finance the invoices of companies that need liquidity. They advance them the money from an invoice corresponding to a good or service already delivered, and the interest on the transaction generates a profit for them. Aware of the advantages of this system for investors and projects, Inversa has developed its own online crowdfactoring platform.

Thanks to it, savers come into contact with organizations. The former seek to increase their capital while simultaneously contributing their grain of sand to create a better world. With the impetus provided by their support, the companies can carry out this improvement. And their viable business project allows them to make a profit and repay the money along with interest.

This is not a standard solution, as investors collect interest in advance and can recover their investment in less than 180 days. It is an agile and flexible proposition, which is highly attractive to both parties.

Only viable initiatives with a positive impact on the community are published to ensure transparency. Once the saver confirms the investment, the amount is sent to the company, from which commissions and interest are deducted. Of this amount, 10% is retained and released once the client pays the invoice and the money is returned to the investor.

In short, the most responsible organizations do not limit themselves to not obtaining profits at the cost of damaging the environment or harming society. Instead, they incorporate these commitments into their internal processes and decision-making, imbuing their entire corporate culture with this spirit.

And when investment puts these values at the center, the benefits are multiplied.

crowdfactoring ethical investing investors real economy saving social responsibility
Inversa Team
Inversa Team

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