In the words of Robert Arnott, what is comfortable in investing is rarely profitable. Often, investors are forced to get out of their comfort zone to identify profitable investment opportunities. So, besides knowing the market as you stretch your investment boundaries, it is equally important to know yourself.
Enter ethical investing. Ethical investing has a lot of variations like socially responsible investing, sustainable investing, clean investing, ESG investing, and more. It means choosing an investment portfolio based on your personal ethics and beliefs. As a result, companies whose operations do not align with your moral code, values, ethics, and principles are not considered when building your ethical investment portfolio.
3 Steps to Start Ethical Investing
Ethically investing is not a walk in the park. Besides analyzing the morality or values a company upholds, you need to analyze technical metrics like debt-to-equity ratio or price-to-earnings ratio.
Ethical investment has been steadily growing, with an estimated $53 trillion growth in global assets under ESG management by 2025. This means ethical investments will hold a third of all global assets by then. This projection is bringing a revolution in investing, with many companies adopting transparent reporting.
Companies that desire to be a part of this projected growth are developing ways to track their corporate behavior and accord it a score. A higher score makes a company a great investment opportunity.
Ethically investing requires you to master these three steps. Once you do, building your ethical portfolio becomes smooth and quick. That way, you can spot potential ethical investments from afar.
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1. Set relevant investment goals
This step requires you to look intrinsically and extrinsically to identify what you want financially and ethically for investment. For instance, a financial objective could be earning market-level returns in the next 5 or 10 years, while an ethics objective defines the company’s actions you support and those you don’t.
E.g., you can support those with operations actively reducing the company’s carbon footprint or those with women CEOs. But you do not support those with ongoing cases of worker exploitation or produce products that harm the body, like tobacco or beer.
It is important to consider both the positive and negative ethical implications of a company’s operations to effectively streamline potential ethical investing opportunities to add to your portfolio.
2. Set a target allocation
This step allows you to choose different asset compositions in your portfolio when ethically investing. This could be bonds or stocks. Identifying the type to invest in dictates the risk you will be taking on. Research and consider market volatility, investment risk tolerance, and timeline before investing. The asset composition will vary depending on your investment timeline.
3. Return on investment
Once you find opportunities for ethically investing and set goals and target allocation, you must consider the return on your investment. What is the underlying value proposition of the investment? Is the company profitable in the long run? Will you receive significant returns during the investment timeline?
Ethically investing is not for the fainthearted. However, courage will teach you that any sound investment will progressively pay off regardless of the severity of a crisis. So, consider these three steps when seeking ethically investing opportunities.