Sustainable Investing: How to Invest Ethically (2024)

What is ethical investing?

Investing is no longer strictly about returns. Today, many investors are also concerned about the ethical values and wider societal impact of their investments. Commonly known as ethical investing, this investment approach places an investor's ethical (moral, religious, and social) values as a primary objective of the overall strategy, sometimes even ahead of profit motives. Essentially, ethical investors want their money to do good, or at least do as little harm as possible.

You might be wondering: Does ethical investing lead to lower returns? It’s important to note that selecting investments based on ethics and values does not always guarantee returns.

Sustainable investing vs ethical investing vs ESG investing

The term ‘ethical investing’ is sometimes used interchangeably with ‘sustainable investing’ and ‘environmental, social and governance (ESG) investing’.

However, the three terms have subtle differences in meaning and application. Sustainable investing is defined as the broad, overarching investment approach that also covers:

• ESG (Environmental, social, and governance) investing

The practice of selecting investment assets that not only prioritise profits, but also environmental, social, and corporate governance issues.

The three components of ESG investing are:

1. Environmental - How a company chooses to act with regards to the welfare of the planet. Environmental objectives could include climate change mitigation, sustainable use and protection of natural resources, and transition to a circular economy
2. Social - How an organisation chooses to treat its employees, suppliers, and local communities. Factors include diversity and inclusivity, and employee health and well-being
3. Governance - How a company is run and managed, particularly in the areas of leadership, executive salaries, audits, and shareholder relations

• Ethical Investing

The practice of selecting assets based on one’s personal ethical or moral principles. Examples include the shunning of ‘sin stocks’ – companies involved in activities that could be viewed as immoral, like gambling, firearms, and alcohol.

Sustainability is becoming an increasingly important element and theme of investing and appears to be gaining momentum. According to the Financial Times, sustainable investments grew by 15% from 2020 to 2022, accounting for 36% of professionally managed assets across the US, Canada, Japan, Australasia, and Europe. Google keyword data showed that in the past year, searches for ‘sustainable investing’ were up 83%, indicating a growing interest in the strategy.

There are many different factors driving this growth. They include:

1. Growing investor demand in values-based investing
2. A rise in ethics- and sustainability-based investment strategies
3. Socio-political changes which were mainly accelerated by the COVID-19 pandemic

Additionally, US corporate ethical standard measurement firm Ethisphere Institute’s 2023 Ethics Index, made up of publicly traded companies named among its list of World’s Most Ethical Companies for 2023, outperformed a comparable index of large cap companies (Solactive US Large Cap Index) by 13.6 percentage points between 2018 and 2023.

In December 2021, IG announced that for each year from 2022 to 2025, it will pledge the equivalent of 1% of the prior financial year’s post-tax profits to charitable causes. This will be in the form of a board approved payment to IG’s charitable ‘Brighter Future Fund’. These contributions aim to tackle education inequality around the world by empowering young people globally through the provision of quality education, especially in the area of financial literacy. Read more about our mission here.

IG Ethical Performance Index: World’s most ethical companies

The IG research team also put together its own Ethical Performance Index (EPI), in which companies were scored and ranked based on three factors:

1. Ethics: The number of times they appeared on Ethisphere’s World’s Most Ethical Companies list since its inception
2. Sustainability: The score they received according to Sustainalytics’ ESG Risk Ratings, where lower scores are better
3. Corporate Social Responsibility (CSR): The score they received according to CSRHub’s CSR ratings, where higher scores are better

In first place is recruitment agency, ManpowerGroup, with an EPI score of 2.61 out of a maximum of 3. The Fortune500 company appeared 13 times on Ethisphere’s Ethical Business List, received an ESG Risk rating of 10 from Sustainalytics, as well as a CSR score of 98 from CSRHub.

It is closely followed by another professional services firm, Accenture, which accumulated an EPI score of 2.55, on the back of 15 Ethical Business List appearances, an ESG Risk Rating of 9.6, and a CSR score of 95.

Also making the top ten are building technologies company Johnson Controls (2.42 EPI score), UK-founded real estate giant JLL (2.38), French energy specialist Schneider Electric (2.21), and US computer and software maker Microsoft (2.2).

Other UK-based and -listed companies that featured on the wider list include: Linde PLC at number 26 (with an EPI score of 1.9) and Northumbrian Water Group at number 87 (with an EPI score of 0.84).

Top-performing companies and stocks: Gender equality, LGBTQ+, and climate change

Below, we also look at the top-performing companies from around the world for each of the following causes: gender equality, LGBTQ+ support, and climate change. They are ranked according to their historical stock price performance in the five years prior to March 2023.

*Scores are from Equileap’s 2023 Gender Equality Global Report & Ranking

Gender lens investing, an investment approach focused on gender-based factors, is playing an increasingly critical role in helping companies to achieve workplace gender balance.

According to the Ethical Invest Group, gender diverse companies can demonstrate lower risk investments and higher returns. UK alcoholic beverage maker Diageo saw one-year and five-year share price returns of 97% and 43% through March 2023, putting it at the top of all companies rated and ranked in gender equality data provider Equileap’s latest report.

Australia property group, Mirvac, which received the highest gender equality score of 79 in that report, saw a slight 4.6% decline over the same five-year period.

*Based on the 2022’s Fortune 500 ranking

LGBTQ+-friendly investing involves investments that focus on companies with lesbian, gay, bisexual, transgender and queer-inclusive policies. LGBTQ+-friendly investments have seen increased focus in recent years.

The compiled list of companies is based on the Human Rights Campaign Foundation’s Corporate Equality Index (CEI) for 2022. These firms all received CEI scores of 100 and made the Fortune 500 rankings in 2022. They have been ranked in order of their five-year stock price returns.

US tech giant Apple topped the table with a five-year return of 274.47% as of March 2023. The company, which ranked fourth on Fortune 500’s annual list in 2022, has an internal resource group and platform for its employees named pride@Apple. The resource offers leadership, education, and networking opportunities to support all of its LGBTQ+ employees. Each year, Apple also releases a signature Apple watch that pays homage to Pride and donates all proceeds to LGBTQ+ charities and organizations.

In second place was healthcare solutions provider McKesson Corp., which offers LGBTQ+ benefits such as transgender-inclusive assistance to employees, coverage for the HIV prevention medication, PrEP, and family health and wellness benefits to same-sex partners.

Climate Change

The table below consists of 10 companies that have received a grade of ‘B’ and above for their efforts on tackling climate change from Climate Action 100+, a voluntary investor initiative made up of 166 target companies that have been identified as critical to the net-zero emissions transition.

Companies with the highest grades are those that have shown the strongest support for a Paris Agreement-aligned climate policy.

*Ratings based on Climate Action 100+’s InfluenceMap Performance Band

The next wave of ethical investing

The future of ethical investing looks bright, as more individuals look for ways in which they can contribute to the world more positively. Demand for impact investing, another area of ethical investing which focuses on supporting businesses that aim to deliver a high measure of societal change and positive environmental impact while providing financial returns, has been rising.

This ever-growing impact market provides capital to address some of the world's most pressing challenges, including: sustainable agriculture, renewable energy, microfinance, and affordable basic services (housing, healthcare and education).

Younger investors are also driven by the ‘major issues of the day’, said one Forbes Advisor editor. Whether it is concerns about climate change or calls for Western businesses to take a stance on Russia’s invasion of Ukraine, ‘investing with a conscience’ has become a key consideration for these individuals.

The current war in Ukraine could also increase investment into sustainable technologies and renewable resources, as European institutional and government funds are encouraged to reduce their reliance on Russian oil and gas.

As previously stated, there are many variations of ethical investing, including sustainable investing, socially responsible investing, green investing, impact investing, and ESG investing. But whichever approach or terminology speaks to you, they ultimately aim to create a positive change in the world through thoughtful investing.

Lastly, one key thing potential investors should take note of is the notion of greenwashing. This happens when companies exaggerate or inflate their environmental friendliness or sustainability ratings in an effort to lead consumers into thinking that their products and operations have greater positive impact on the environment and society than is true.

As with any investments, it is crucial that you do your research, define your goals, create a plan, and monitor your investments regularly. Combined with out-of-hours trading, you will be able to enjoy extended access to various markets, potentially allowing you to maximise profit-making opportunities and minimise any risks on existing positions.

Embark on your ethical investment journey with IG today.*