Why did the ethical investor bring a tree to the stock market? To ensure their portfolio had strong roots! While not (necessarily) literal, this joke offers some wise insight into how to make ethical investing work for you.

Strong roots are a metaphor for a solid strategy, one that forms the basis for healthy growth while ensuring investments really are doing good, and not simply falling for marketing hype or misdirected good intentions.

People, Planet or Both?

Given that ‘ethical’ means different things to different people, it’s important to determine what it means to you. The more technical term for ethical investing is ESG (environmental, social and governance) investing.

You may be keen to invest in one particular aspect or take a comprehensive approach. Either way, your definition will guide you toward certain investments and to exclude others:

• Product or service offering (some people avoid gambling, mining, tobacco and the like).
• Supply chains (small or large businesses; local or foreign – especially poorer countries).
• Ownership structure.
• Sources of finance.
• Corporate governance (including tax contributions, staff turnover, reputation).
• Environmental footprint (past, present and goals for future).
• Social and charitable activities.

Be diligent in assessing how green an investment is compared to its claims – there are many shades of green and even covert attempts to paint it in a different color to reality.

Is AI Ethical?

AI is a hot topic nowadays and should be considered as part of any ethical investment plan.

Whether you invest in AI directly or indirectly, utilize it in your own business, use it personally for managing investments, superannuation and banking (from complex strategy formulation to simply using website chatbots), or avoid it at all costs ultimately depends on how you personally answer this question: Is AI ethical?

Some users find AI programs take shortcuts and even lie when completing tasks, because software only has mandates, not ethics. Apps are still learning what are and are not reputable sources from which to draw information.

AI is being used for sinister purposes like scams, deepfakes and even cyber warfare. Plus, many people are concerned about it making their jobs redundant.

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Conversely, AI offers scope to improve human productivity and assume functions that people either can’t or won’t take considerably longer at, or are more prone to making errors when doing.

It is also creating new employment opportunities – directly through development, sales and support as well as indirectly through its applications within other industries.

Outcomes

A key part in assessing the ethics of any investment is determining its outcomes and usage.

Property is a great example. Sustainable property investments – direct or through shares and real estate investment trusts – may look to be a great ethical investment option at face value. But they won’t be ethical if they:

• Seek to cash in on luxury residences or commercial offices at the expense of much-needed affordable and social housing.
• Don’t embrace the latest in sustainable design elements and materials.
• Occupy greenfield sites and destroy natural habitat during construction.
• Were financed through lenders with heavy involvement in industries contrary to your personal ethics.
• Have end-users who operate unethically or illegally, or who greenwash their activities by taking a sustainable address.

Changing Realities

Technological advances, legal amendments, market movements and changing societal attitudes mean the investment landscape is constantly evolving. Change is the only constant.

As such, your approach to investing in an ethical manner needs to change as well. Revisiting your investment strategy regularly is not only key to ensuring it delivers sustainable financial returns, but that it keeps to your ethical goals and expectations.

It may seem obvious, but the point of any investment is to deliver a financial return.

One of the risks associated with ethical investments is getting distracted pursuing a ‘good cause’ and failing to see whether the numbers add up. That includes purchase costs, ongoing compliance and management expenses, regulatory impacts, taxes and expected returns.

Ensure you invest funds where they will deliver the best financial returns. Then use non-investment funds for charitable donations – and remember to claim the tax deduction too.