Ethical Investing

DEFINITION of 'Ethical Investing'

Using one's ethical principles as the main filter for securities selection. Ethical investing depends on an investor's views; some may choose to eliminate certain industries entirely (such as gambling, alcohol, or firearms, also known as sin stocks) or to over-allocate to industries that meet the individual's ethical guidelines.

Ethical investing is sometimes used interchangeably with socially conscious investing, but socially conscious funds typically have one overarching set of guidelines that is used to select the portfolio, whereas ethical investing brings about a more personalized result.

BREAKING DOWN 'Ethical Investing'

Ethical investing gives individuals the power to allocate capital toward companies that are in line with their personal views, whether they are based on environmental, religious or political precepts. Investors should keep in mind that "ethical" does not imply "outperform."

A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as where you want to see your money invested. From there you can come up with an asset allocation plan and begin researching individual securities and funds.

History of Ethical Investing

Often, ethical investing is motivated by one's religion, and the industries avoided are seen as those that promote sin. The earliest recorded instance of ethical investing in America was made by Quakers in the eighteenth century, who restricted members from investing their time or money in the slave trade. Around the same time, John Wesley, a founder of Methodism, preached on the importance of refraining from investing those industries that harm one's neighbor, such as chemical plants, in his speech "The Use of Money."

In the 20th century, ethical investing gained traction based more on people's social views rather than their religious ones. Ethical investments tend to mirror the politics and trends of the time. In 1960s and 1970s America, ethical investors focused on those companies and organizations that promoted equality and rights for workers and shunned those that supported or benefited from the Vietnam War. Starting in the 1990s, ethical investments began to focus heavily on environmental issues, and ethical investors moved away from coal and fossil fuel companies toward those that supported clean and sustainable energy. That trend continues today.

How to Invest Ethically

No matter what your intentions, it's important to fully research a company before investing. You must determine whether the investment is a sound financial decision by reviewing the company's history and finances. However, financial return is only one aspect of ethical investing--you must also look into the company's commitment to ethical practices. For example, you can read a company's mission statement, but it's also important to research their track record and how they've impacted the community in the past.

For an in-depth guide to ethical investing, read Ethical Investing: How To Research Ethical Investments.

RELATED TERMS
  1. Code Of Ethics

    A guide of principles designed to help professionals conduct ...
  2. Business Ethics

    The study of proper business policies and practices regarding ...
  3. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  4. Self-Regulatory Organization - ...

    A non-governmental organization that has the power to create ...
  5. Corporate Citizenship

    The extent to which businesses are socially responsible for meeting ...
  6. Security Analyst

    A financial professional who studies various industries and companies, ...
Related Articles
  1. Fundamental Analysis

    Ethical Investing: A Niche Style Gains Popularity

    By Amy Fontinelle Ethical investing is still a niche investment style, but it has gained popularity. According to the Forum for Sustainable and Responsible Investment (US SIF), "From 20 ...
  2. Fundamental Analysis

    Ethical Investing: Introduction

    By Amy Fontinelle What is ethical investing? The definition depends on your personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about ...
  3. Professionals

    Ethics and Standards

    CFA Level 1: Section 1 - Ethics and Standards
  4. Investing Basics

    The Ethics Of Investing

    The proper application of ethics to the world of investments is a highly subjective topic.
  5. Economics

    What is a Code of Ethics?

    A code of ethics is a collection of principles and guidelines an organization expects its employees to follow.
  6. Investing

    Asset Manager Ethics: Acting Professionally and Ethically

    To aid managers in understanding the requirements for ethical and professional behavior, we offer some basic guidelines.
  7. Professionals

    Code of Ethics

    CFA Level 1 - History and Code of Ethics
  8. Fundamental Analysis

    Ethical Investing: Leaving An Ethical Legacy

    By Amy Fontinelle You have two choices when it comes to how your assets will be distributed after you die. You can create a plan now, or someone else will create one after you're gone, leaving ...
  9. Investing Basics

    Ethics

    These college classes will help you prepare for the working world - and stand out from your peers.
  10. Fundamental Analysis

    Ethical Investing: Benefits And Drawbacks Of Ethical Investing

    By Amy Fontinelle There are many reasons to pursue ethical investing - and many reasons why people avoid it. Here, we take a closer look at their motivations. The Feel-Good FactorEthical investing ...
RELATED FAQS
  1. Are investments in the drug sector appropriate for ethical investors?

    Explore the question of whether investments in the pharmaceutical industry are appropriate for investors who wish to pursue ... Read Answer >>
  2. Why are business ethics important?

    Learn why ethics are an integral aspect of management philosophy and how sound business ethics benefit business, both large ... Read Answer >>
  3. How do business ethics differ from industry to industry?

    Learn how business ethics differ based on industry, from energy companies' environmental stewardship to tech firms' respect ... Read Answer >>
  4. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ... Read Answer >>
  5. How have business ethics evolved over time?

    Learn about the evolution of business ethics over times, from the rise of social responsibility in the 1960s to ethics in ... Read Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center