DEFINITION of 'Fair Trade Investing'

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.

 

BREAKING DOWN 'Fair Trade Investing'

Fair trade investing mainly deals with trade in agricultural products, such as coffee, sugar and textiles. Many of the growers of these products are low-income workers who are often marginalized in trade agreements and receive few subsidies from their home governments. Fair trade practices aim to help these workers gain a higher standard of living and financial independence, while the companies who actively promote fair trade can show transparency in their business dealings and gain valuable image points with shareholders.

Principles of Fair Trade

According to the World Fair Trade Organization, the basic principles of fair trade include creating opportunities for economically disadvantaged producers, promoting transparency and accountability at all levels of the supply chain; employing fair trading practices by not maximizing profit at the expense of small producers; insuring orders are paid or partially pre-paid on receipt of documents; having buyers consult with suppliers before canceling or rejecting orders; avoiding unfair competition; promoting and protecting the cultural identity and traditional skills of small producers; fair pay to the producers and can also be sustained by the market; insuring no child labor or forced labor; and no discrimination in hiring, remuneration, access to training, promotion, termination or retirement based on race, caste, national origin, religion, disability, gender, sexual orientation, union membership, political affiliation, HIV/AIDS status or age.

At the Investor Level

In terms of picking investments that promote fair trade principles, there's no push-button answer. An investor must investigate each company to learn their practices. Socially responsible mutual funds and other investments are available. Each may have its own definition of fair trade practices. 

Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in social justice, environmental sustainability and alternative energy/clean technology efforts. Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF).

Keep in mind there are two inherent goals of socially responsible investing: social impact and financial gain. The two do not necessarily go hand in hand; just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return. An investor must still assess the financial outlook of the investment.

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