Definition of Ethical Investment
Ethical investment refers to a specific kind of financial operation whose purpose is to deliver a social impact and gain an average or above-average financial return. The investment can be made by individuals as well as private companies, governments and so on.
Breaking Down Ethical Investment
A natural person as well as an equity firm can decide to allocate its capital in those companies with a transparent ethical culture. They can therefore decide to avoid investing in industries such as tobacco, pornography, weapons etc.
When you decide to make a social investment, you have to take into consideration many variables. First, it goes without saying that you need to know the financial situation of the company you plan to invest in. That is, analyze the balance and gauge factors such as the industry of reference, the management model, competitors, long-term perspectives and so on. Then, you have to estimate the ROE (return on equity) and compare it with the average market return you expect to gain. You can use the CAPM (capital asset price model) methodology to have an objective and solid benchmark. We suggest you rely on a bank or a fund to better manage these aspects.
Secondly, there is the ethical side. As a matter of fact, if you plan to invest with the purpose of delivering a social impact, this is the most important and delicate part of the process. You have to make sure that the company/project you are investing on is worth it. What’s its history? Does it engage in social and responsible initiatives?
It’s not an easy task. Imagine you want to invest in Walmart. They spend millions (perhaps billions) of dollars every year for charitable and social projects. Nevertheless, it’s not secret that the American giant retailer has been criticized several times by unions, consumers and institutions for its work policies and business practices. Therefore, it’s important you gather as much information as possible before making the final decision.
Why Ethical Investment Is A Good Choice
In conclusion, investing with an ethical and moral purpose is possible. And more and more people are doing this. The objective is to invest in those companies socially committed with a true and transparent CSR policy in place. And discard those financial opportunities represented by firms with a bad reputation.