What Is Fair Trade Investing?

Fair trade investing refers to investing in companies or projects that promote fair trade with producers in developing nations. Basic fair trade philosophies call for a living wage for suppliers of raw goods and materials, as well as respect for strong environmental practices and a focus on the trading relationships between advanced economies and developing nations.

Key Takeaways

  • The fair trade movement seeks to promote sustainable development, small-scale production, fair wages and prices, and environmentally-friendly business activities.
  • The words "fair trade" are a reference to "free trade," the economic philosophy that promotes open borders and globalization.
  • The fair trade movement is a group of certifiers and membership organizations that identify products and brands that use fair trade business practices.
  • Fair trade investing seeks to support businesses that engage in fair trade practices, such as traditional farming, small-scale production, fair wages and prices, and environmentally-friendly business practices.
  • While there is no universal definition for "fair trade," there are many mutual funds and other investment products aimed at retail investors who wish to support fair trade practices.

Understanding Fair Trade Investing

Fair trade investing deals with trade in agricultural products, such as coffee, sugar, and textiles. These crops are typically grown in plantation-style monocultures, with high environmental and social costs. In opposition to commercial planting, fair trade seeks to promote small-scale production, sustainable agriculture, and humane wages and working conditions. Some fair trade organizations also support factories with unions and living wages, as opposed to fast fashion and sweatshops.

The term "fair trade" arose in apposition to the phrase "free trade," the economic philosophy of open borders and markets that became popular in the 1980s and 1990s. Free Trade Areas such as NAFTA raised concerns that communities and livelihoods could be threatened by globalization, as international competition forced workers and producers into a race to the bottom.

Several organizations offer fair trade certifications, allowing socially conscious consumers to support ethical business practices by purchasing products with a fair trade label. These organizations aim to help these workers gain a higher standard of living and financial independence, while the companies that actively promote fair trade can show transparency in their business dealings and gain valuable image points with the public and their shareholders.

Principles of Fair Trade

While there are several different fair trade labels, certifications, and organizations, they share similar goals of promoting fair prices and wages, supporting marginalized producers, and using environmentally friendly business practices. One of the largest is the World Fair Trade Organization, with over 400 member organizations and networks dedicated to supporting businesses that prioritize people over profits.

The WFTO publishes a list of ten principles of fair trade. They are:

  • Transparency and accountability
  • Fair trading practices
  • Payment of a fair price (including wages)
  • Ensuring no child labor and forced labor
  • Commitment to non-discrimination, gender equity, and freedom of association
  • Ensuring good working conditions
  • Providing capacity building
  • Promoting fair trade
  • Respect for the environment

Similar lists are published by other fair trade certifiers, but not all fair trade organizations are equal. While some fair trade organizations will allow their label to be used by brands that follow specific fair trade business practices, the WFTO evaluates the entire supply chain to ensure the consistent application of free trade principles.

How to Invest in Fair Trade

There is no universal agreement on what constitutes fair trade, and investors should be careful to research a company's business practices before committing their money. There are many socially responsible mutual funds, exchange-traded funds, and other investment products that focus on environmental or socially desirable outcomes, including fair trade practices.

Many investors use environmental, social, and corporate governance (ESG) criteria to identify investments with desirable environmental or social outcomes. These funds often focus on renewable energy, sustainable agriculture, social justice, carbon trading, or other ethical business practices.

Socially responsible investing seeks to generate financial profits as well as social impact, and these goals do not always go hand in hand. A socially responsible investment does not necessarily provide investors with a good return, although there is some evidence that ESG funds may be able to outperform the wider market.