Dictionaries list several different definitions for the word "ethics." The primary definition is a system of moral principles, and a secondary definition is that it is the rules of conduct as used by a specific group or culture. The final definition of ethics is as a branch of philosophy dealing with values relating to human conduct, with respect to the right and wrong of certain actions and their respective motives and consequences. Nevertheless, the proper application of ethics to investments is a highly subjective topic that can raise some difficult questions for both investors and the regulatory agencies.

The Ethical Puzzle
Although the definition of ethical investing could be stated as simply purchasing investments from issuers who act ethically, investors who seek to achieve this must first establish a set of abstract criteria that can be used to determine what actions and practices are ethical. For example, the Bible and other religious books provide rules and principles for people to live by, and those who believe what those books say use them as guides to evaluate things in the world around them. Therefore, an investor who adheres to Judeo-Christian values might avoid buying shares of Playboy because of what the Bible or Torah says about sexual immorality. Religious texts and other moral teachings, however, do not always provide crystal-clear guidance for practical investment decisions.

Although creating or finding the ethical criteria to use as the basis for evaluating investments may often be relatively simple, effectively applying that criteria to actual investment choices can be more difficult. The Bible also condemns drunkenness in several passages, but does this then make it unconditionally wrong to purchase securities issued by makers of alcoholic beverages? Since not all consumers of alcohol get drunk, then the investor will have to decide for him or herself whether this investment truly supports immoral behavior. Virtually all issuers of securities or investments most likely do something that at least a substantial percentage of their investors do not approve of (how many investors who buy treasury securities approve of everything that is done by the government?) Of course, this begs the question of which practices and policies are tolerable for investors and which are not.

Ethical Issues
Although the values and beliefs that guide ethically-minded investors differ somewhat for each person, there are several specific areas where ethics play a major role. Some of the more notable issues that investors examine from an ethical standpoint include:

  • Winning at someone else's expense - Although there will inevitably be both winners and losers in a free market economy, the issue of how a company wins is a concern to some. Companies that have monopolies in a market or industry can function very efficiently in many respects, but they also effectively prevent any form of healthy business competition, and some investors consider this to be unethical.
  • Environmental Responsibility - Heavy industry such as energy and manufacturing have long been perceived as destroyers of nature and wildlife with their pollution and decimation of forests, oceans, lakes and rivers. Ethical investors favor companies that replace what they take from the earth and adhere to governmental standards for emissions.
  • Abortion and Stem-Cell Research - Companies that profit from certain medical procedures or types of research are often considered to be unethical or even criminal by those in the Judeo-Christian community.
  • "Sin" Industries - Although the concept of an industry being sinful is obviously somewhat subjective, a proportion of the investing public still considers makers of alcoholic beverages, tobacco companies and the pornography industry to be at least somewhat taboo. The products that these industries produce have been proved to be clearly harmful in one respect or another, at least under certain circumstances. The tobacco industry has long been accused of targeting teenagers as customers and making its products as addictive as possible in order to fuel sales, while the dangers of alcoholism and drunk driving stem from the production and distribution of liquor. The effects of pornography are perhaps less tangible, although more than one study has linked the use of porn to various types of sex crimes. Of course, these industries have made efforts to raise public awareness of the dangers of misusing their products and services.

Socially Conscious Investing
Many investors who seek to avoid what they consider to be unethical investments look to vehicles such as socially conscious mutual funds that screen companies according to specific ethically-based criteria. Many such funds are offered by religious denominations such as the Lutheran Brotherhood, which typically avoids investing in any of the industries listed above and can provide investors with a clear conscience in this area.

Other Considerations
Of course, the ability of investors to make informed ethical choices is dampened by the quality of information that they receive. For example, tobacco companies have yet to admit that they have intentionally made their products unnecessarily addictive, and governmental regulations have not fully rectified this issue. The accuracy of emissions and other environmental reports that are issued by major conglomerates such as Exxon are also often suspect, and the data published by other companies such as Enron and WorldCom that were found guilty of major accounting fraud was also clearly false.

The Bottom Line
Ethics are morally subjective by nature, and there is no absolute standard for what is or is not an ethical investment. Investors must ultimately decide for themselves what they consider to be ethical and then try to apply that to their investment choices. For more information on ethical investing, consult your financial advisor.

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