We're living in turbulent times. Between gender inequality, climate change, race inequality and needless wars breaking out around the world, there are no shortage of things out there to keep our anxiety levels high. If you're really interested in trying to contribute to positive change in the world, ethical investing is an intriguing option to explore.

The concept of ethical investing is rooted in the reality that our economic systems, the pursuit of power and money, are connected to many inequalities and injustices in the world. And just as it can be a root cause, money can also be a solution and source for hope.

Ethical investing is all about ensuring your money is used to create positive change in the world. Ethical investing is not about giving up profit margin or a making hard personal sacrifices. Socially responsible investing is still profit driven, but it doesn't seek profit alone. Returns can be measured through double and triple-bottom line lenses, incorporating our impact on people and the planet, as well as profit, into an overall return profile.

Today, ethical investing is still somewhat of a nebulous and subjective term.

The reason for this is simple - we all have different definitions of what is ethical and what isn't. While many of us share a similar moral compass, there is a sufficient gray-zone in what might be deemed an ethical investment. If you are interested in ethical investing, the important thing to remember is that there isn't really a right and wrong. Knowing that your money is aligned with your personal values is the key. It can bring you peace of mind knowing that you're doing all you can to help right all of those wrongs in the world - or at least the ones that speak to you the most.

In this article, we'll be talking about what ethical investing means, how you can start being your socially responsible journey through ethical investments, how to build your personal impact portfolio, and whether or not such an investment strategy is profitable.

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What is Ethical Investing?

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To understand ethical investing, it's best to start with today's mainstream, market-based investment philosophies. Traditional mainstream investment goals are focused on profit for the owner of the asset. In the case of a publicly traded stock, that is merely reflected by an increased stock price.

In certain cases, in an effort to increase that stock price, corporations and their leaders may make decisions that come off as inhumane or unethical.

An example of this might be a company that uses less healthy or compromised raw ingredients or fillers in a food product. While lower quality ingredients may reduce the cost of production, and therefore return a greater profit per unit sold, that product may also represent a health risk to the consumer of that product. Perhaps that consumer is a nursing mother or an immune-compromised elder that has major health consequences as a result.

Another example might be a large financial institution that provides high interest funding to companies that source mined minerals from conflict zones. The bank might be able to show a higher profit due to the higher interest rates they're charging these companies, but it comes with large impacts to the people within those geographies and the associated environmental impact of those mining practices.

There is, of course, nothing wrong with making a profit, but the ends don't always justify the means.

Ethical investing doesn't just look at profitability but the corporation's values as well. Socially conscious investing uses additional filters to ensure companies are operating in a manner that aligns with basic ethical guidelines around social issues. And if your next question is: Well, that sounds obvious, don't all companies follow basic ethical principles? The answer is: Sadly, no.

The term ethical investing can be rather broad. It can incorporate issues as broad as environmental impact, workers' rights, environmental justice, gender equality and more.

There are also certain definitions to be aware of if you want to make ethical investments. You'll see ethical investment is a catch-all term that incorporates more specific investment strategies.

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• Ethical - Differentiating positive or negative ethical values to help split investments (into positively or negatively ethical investing).
• Socially Responsible Investing (SRI) - Investment strategies that revolve around ethical, environmental, social, and governance issues.
• Impact Investments - Making smart investments that have an impact on society while achieving financial gains.
• Sustainable Investing - Revolves around social and environmental sustainability problems in an effort to deliver positive investment returns and fight climate change.
• Green Investing - Look for companies involved with positive actions instead of excluding those that are negatively influencing the world.
• ESG (Environmental, Social, and Governance) - A relatively loose definition that incorporates ethical standards based on the following investment principles:
• Environmental - Pertaining to the company's energy use, impact on the environment, dealing with waste pollution, etc.
• Social - Revolves around problems such as gender inequality, diversification and inclusion of sensitive groups, donations, charity, and contributions to the local community.
• Governance - Incorporates a company's established policies to avoid legal trouble and illegal practices through increased transparency.

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Can you Make Money by Investing Ethically?

Yes, ethical investing doesn't need to sacrifice return!

The markets and political climate are favoring companies that have strong track records when it comes to social and environmental issues, and more and more businesses are trying to establish the necessary processes and controls to qualify as ethical corporations.

These companies are generally thought to have staying power for generations to come. They reflect the reality of society's current moral fiber and that typically corresponds to higher customer adoption and higher profit margins.

Ethical investing as a concept should never be correlated with lower returns. Just like traditional investing, some companies have better returns than others, and this reality of investing holds true regardless of the companies' sector or ethical preferences.

Your ethical portfolio can have a phenomenal return!

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A Step-by-Step Process Behind Ethical Investing

Ethical investing and impact investing are broad categories and it sometimes feels a bit difficult to get involved. Here are some steps to consider when making your own investment decisions.

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Choose Which Issues you Want to Focus On

It's best if you take it slow and use your personal beliefs as your guide to narrow your investment search on a few ESG factors. Remember: Ethical investing is subjective so consider building a portfolio that takes a couple of issues into account.

There are plenty of ESG mutual funds, sustainable funds and socially responsible investments out there to choose from. Many of these products provide broad diversification as well so you aren't putting all your eggs in one basket.

If you want advice, consider talking to an investment advisor who specializes in the ethical practices you are most interested in. Your brokerage account likely has an expert you can talk to. Even better, find an independent advisor to provide objective advice.

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Pick an Approach to Use for Ethical Investing

There are a few ways you can approach ethical investments.

You can choose to avoid investing in specific sectors from the portfolio. This is often referred to as employing a negative filter. For example, you can exclude classic sin stocks. Sin stocks are publicly traded companies associated with activities that are considered immoral or unethical. These companies may profit by exploiting negative behavior. Tobacco, alcohol and pornography companies are often grouped into this category. Ethical investments that filter out things like sin stocks or fossil fuel companies are the most common form of socially responsible investment as it still leaves a broad universe of stocks to choose from.

The other method to build your own portfolio is to invest in companies seeking to solve major global issues. Since you are being more selective, this might be considered a positive filter. A fund's holdings might include certain investments in sustainable energy companies or companies seeking to build scalable affordable housing for disadvantaged communities, for example. Though this ESG investing is perhaps more impactful, it is not as common since there are usually only a limited number of companies focused on these specific investments.

If you're new to ethical investing, mutual funds are a great place to get started to build a portfolio around your personal ethical code. Plenty of investments advisors have built out socially responsible mutual funds and ESG funds that offer proper diversification.

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Create a Diverse Investment Portfolio

True of any investment philosophy, you'll want to diversify your portfolio instead of focusing on just one stock. If you aren't a professional investor, diversification allows you to better manage the risk tolerance of your own portfolio. This is another reason why a mutual fund or ethical funds may be a great option for you. Diversification enables you to spread your money across a number of companies that fit your criteria for positive impact.

If you are picking a fund, make sure you look at the fund performance.

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Final Words

Ethical investing is an important part of making a positive difference in the world, especially as an individual investor. Corporate governance is a delicate thing that can slip and break at any moment. Thus, intelligent investing is necessary to guarantee the effectiveness of ethical funds.

In the end, it's evident that we can make a difference; we can make the world a better and healthier place for everyone where equality is ever-present. Good luck!

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