While essentially the traditional obligation of a business is to expand its profits, a social shift in consciousness now dictates the boundaries in which businesses can operate to expand their profits. In short, the profit motive.
Certain business operations have had a negative impact resulting in environmental pollution, threats to certain animal and plant species or human exploitation.
Ethical investors see their value as a major influence in having businesses look at their modus operandi and adjusting it to lessen the perceived negative impacts and to produce a more benevolent outcome – better working conditions, less impact on the environment and surrounds.
However, there seems to be the line of thought that ethical investors must be prepared to forego the profit opportunities that they may find elsewhere in exchange for the social or environmental benefit.
This is where the concept of “market failure” comes in, which in fact, could actually be an opportunity. One such market failure is “information asymmetry” – the absence of enough information which could have provided market based allocation of resources to occur. By ethically investing and concentrating on social and environmental deficiencies, certain innovative operations may be stumbled upon which in turn, could generate untapped profit opportunities.
Sustainability is also in contention, indicating to investors to expect returns at a basic lower level, with experimental information to contest this suggestion not yet evident, yet by all forecasts and hypotheses, there is no evidence why this necessarily needs to be the “norm”.
There is a huge emotional quotient when it comes to decisions regarding ethical investment. Your conscience plays an important role when choosing who to hand your money over to, on who best treats their workers and shareholders best and whos governance is in line with social and human rights dictations as well as who carries out operations with the least impact on the environment and its surrounds.
Some of the advantages is that feeling of validation when your investments perform well financially, conveys great returns to your portfolio while continuing to carry out the good that you expect it to.
The down side is the disappointment and frustration you may feel when the organization fails to uphold one or more of the standards you thought it stood for, or that if what it stands for fails to reap the financial rewards you had hoped for or worse, contribute to your financial misfortune.
Ethical investing can support your belief framework, and while it can be unrealistic sometimes to strictly adhere to the tenets of your framework ie, using purely organic ingredients with a proven track record that the production and distribution is clear of human exploitation for your dietary requirements or to ride a bicycle to work everyday to be completely green, you can invest in ethical companies and sectors as a way of supporting and enacting this framework without having to drastically change your living standards.
Nobody and nothing is perfect and it is rare for something to be everything to everyone. This is where the art of compromise steps in – to look at what each investment option has to offer and to see if you can live with the activities and tenets that you don’t necessarily agree with.
Look at the trade offs. If a company’s operations is 95% you are in agreeance with, are you willing to put up with the 5% that you don’t like as a trade off and invest?
Sometimes, you need to consider the risks, the possible outcomes and choose the lesser evil, because after all, compromising and living with the lesser evil is better than not investing at all and foregoing the off chance of financial success.
When you disregard a potential investment channel just because it doesn’t meet all of your environmental, social or governance criteria, you will unavoidably screen out potential performers that can present you with high returns. This doesn’t mean that what you ethical investment you decide to go with will result in lower returns, however, it will take more work and time to find the right investments for you.
A lot of work goes into researching and finding the right ethical investment channel for you. Extra time is required during the research and assessment stage as opposed to if your decisions were centered securely on financial performance. On the off chance that you may find that it to be too hard and too time consuming you may consider contributing ordinarily and focus on charity as the recipient of the rate of your profits.
VFS Group have together with leading industry experts developed a Negative and Positive screening process as to identify the right Ethical, Social and Responsible investments for you. We have ESG data on over 3,500 securities globally. Our research allows our clients to tilt their portfolios to higher scored companies.
Should you choose to put your resources into ethical mutual funds, you may find the costs higher than that of the conventional investor. This is because you are essentially paying for someone to do the groundwork for you. The price of convenience can be high, and can potentially drag down your return especially in the long term. This is why it is important for you to have a knowledge of your own capabilities and know how much you’re willing to sacrifice for the sake of convenience.
VFS provide you with the same returns without the fees. All investments are held in your name and together with your ethical portfolio manager tailor a strategy to your ethical motives.