Whether you’re a millionaire or working class citizen, investing is an important part of managing your personal finance. When selecting an investment, the primary metric of success is your return. For many years, investors have focused exclusively on the return, willing to do whatever it takes to maximize their income. But lately, there has been a new trend growing in the business community. Ethical investing is the process of not just looking at the return, but also how the investment benefits society. This has led to a growth in industries like health care and social services and a reduction in finances available to so-called ‘predatory’ industries such as debt collection.
But what exactly is ethical investing? And can it impact your bottom line? We had to get to the bottom of the topic.
Growth of Ethical Investment Firms
Ethical investment firms, often referred to as socially responsible investment firms, are companies that build their portfolio with businesses that contribute positively to the world. These contributions aren’t always financial. Often, they’re environmental or social benefits. There is even a sub-industry known as “impact investment” that considers the most successful investments to be the ones that have the largest social impact. Commonly invested industries include green, eco-friendly power providers, businesses that directly attack social problems, and much more. These industries were virtually unheard of 30 years ago, but today they represent a multi-billion-dollar segment of the marketplace.
Not All Black & White
The problem with ethical investing is that the benefits are not always clear. Sure, it’s obvious that a power company using wind and solar are more environmentally friendly than an industry that uses coal. But not all ethics are quite as clear. Take the reverse mortgage for example. These financial services are used responsibly my millions of people, but others regret their decision. The same can be said for credit cards or student loans. There are some who feel that any type of finance is predatory. When used incorrectly, any financial tool can be problematic. But it’s impossible to write off the entire industry when the services are used by many so happily. This means that something that may be considered ethical to some, might not to others. At this point, selecting an investment becomes a personal matter. The important thing is to look and see how an investment affects the world and make your own decision to see if it’s something you can get behind.
How Ethical Investing Can Improve Returns
On paper, it might be hard to justify investing in an environmentally friendly company when their returns are 20% less than the commonly accepted alternatives. But there are a few ways that choosing the responsible option can pay off. Problematic industries are often heavily regulated. When laws change that favor one way of business over another, ethical options can quickly see returns on their decisions. Even though your short-term gain might not be quite as large, there are many more options for long-term growth. Choosing the ethical option also reduces your regulatory risk, creating the perfect investment for long term savings.