In broad terms, socially responsible investing, more commonly known as ethical investing, refers to choosing investments that maximise returns, while
also minimising adverse social outcomes.

The fundamental question that arises in ethical investment discussions is whose ethics are ultimately factored into investment decisions? Is it the investor, the investment manager, or management of the company invested in? The answer to this question is complicated and involves more stakeholders than just these. Let’s start at the beginning of the investment chain, ie with the investor, and work our way backwards to explore some of the intricacies of this debate.

As an investor you have 100% freedom to choose any investment you like. Accordingly, if you decide you would like to invest ‘ethically’, you must first decide what ethical means to you. For example, do you exclude companies involved in certain industries / sectors (eg tobacco, gambling etc), or countries that have a history of violating human rights (eg some of the developing countries)? Conversely, you may only wish to include companies in your portfolio that have strong environment, or social justice1 policies. The issue with both of these approaches is how far do you go? For instance, do you exclude a paper manufacturer for making paper for a cigarette maker? And do you include an electronics company for its sound environmental and labour standard policies, despite it supplying computers / chips to a poker machine or weapons manufacturer?

An alternative to choosing the companies yourself is to choose an ethical managed fund. However, now you are at the whim of the investment manager and their ethical beliefs. Are their ethics the same as yours? While it may be possible to find a fund manager that invests according to some of your ethical concerns, it may be difficult, if not impossible to find one that matches them all. So you must decide how important it is to you to match all of your ethical concerns, vs only matching some of them!

You decide that doing your own research is too onerous, and you manage to source a fund that matches most of your ethical concerns. Now the considerations move to the ethics of management in control of the respective companies that the fund invests in. Despite having a strong local environment policy, what if a company has production plants in developing countries that account for less than 10% of production, but the countries are currently excluded from carbon emissions targets? At what percentage would you be happy?

When thinking about ethical investments, it’s hard to avoid the topic of labour standards.One of the most commonly cited ethical standards is to avoid the products of a company that uses child labour, eg while a 12yr old working for $2 day making t-shirts may sound offensive to you; to the child’s family, $2 a day may provide one decent meal a day and clean drinking water for the whole family. And therein is a major ethical dilemma; is it more important for domestic investors to invoke their ethical principles on a foreign labour force, just so that their ethical investing standards can be upheld, or should workers in developing countries be allowed to forge whatever living they can just to survive? Where does the moral obligation lay in this question?

There are different ways of engaging in ethical investing. One is to invest in a company, and then as a socially-minded shareholder, try to positively influence their corporate behaviour. Whilst this may be difficult to achieve as a single small shareholder, there are now groups that ethically minded shareholders can join, which collectively try to affect corporate decision making. The Ethical and Green Shareholders Groups provides a network that smaller shareholders can use to air their grievances and suggestions, and coordinate as a group to make representation to their respective boards, and, ultimately, to their fellow shareholders.

Another approach maybe to participate in raising awareness of a product (or service) that violates your ethical standards, with the aim of hurting the producer through reduced sales and profits; thus forcing them to change their unethical policy. This is definitely a more radical tactic and needs to be balanced against general public backlash.

An often forgotten ethical consideration is your obligation to yourself and your family. By investing using a purely ethical strategy, you may end up hurting yourself and your loved ones through reduced investment performance. A more appropriate way of balancing your social conscience with your investment needs may be to have a ‘normal’ well diversified investment strategy, but then donate a portion of the earnings to various causes.

Ethics is a highly charged and personal emotion; what’s acceptable to one person, may not be to another. Therefore, there is no one right answer on how to construct an ethical portfolio. Building social principles into an investment strategy is definitely achievable. Ultimately it comes down to your ethical will, and as with anything, how you go about implementation.


1. From an ethical investing perspective, social justice summarises consumer protection, human rights and diversity