Nuns and other religious leaders were some of the earliest pioneers in ethical investing. But now, it’s gone mainstream. Individuals, family offices, and both accredited and even non-accredited investors can invest in this movement whereby companies and businesses consider all stakeholders, including the environment, rather that focusing solely on maximizing financial returns.

What is ethical investing?

Ethical investing is a way of investing that prioritizes companies or projects that are addressing social or environmental issues in addition to profit. Sometimes these projects can align with personal beliefs, hence the term values-aligned investing. Socially responsible investing  (SRI) and sustainable investing are also frequently used interchangeably, or used to indicate a societal focus or environmental focus, respectively. Impact investing, as we’ll look at a bit later, is more narrowly focused and demands some form of social or environmental impact in addition to financial returns.

Step 1: Determine your values and causes

There are multitudes of projects and investing opportunities for all belief systems and societal aspirations. That’s why you need to know what’s important to you and what you care about. I always like to start with a values-writing exercise to determine your core values and why they matter to you. This values list from Brene Brown is helpful.

After that, begin to focus in on the causes and outcomes you’d like to see realized. Maybe that’s a full transition to green energy or equal economic opportunity for people of color and women. The UN Sustainable Development Goals are a useful framework, though I encourage you to get even more specific. 

Step 2: Start with Research and Negative Screens

As you start looking to invest ethically in the stock market (aka the public markets), you’ll find a LOT of “negative screen” funds, as well as “ESG” funds. 

Negative screen funds are those which intentionally exclude certain industries or types of companies. For example, fossil-free funds are those that don’t have any oil, gas, or coal companies; there are other funds that avoid all the “sin industries” like tobacco, weapons, alcohol, gambling. With any negative screen fund, it typically includes a broad base of other companies, and therefore, you are likely to get close to market rate returns for that sector, mid-cap growth, for example. 

ESG stands for Environmental, Social, and Governance, and has been at the center of a lot of political and media controversy. But at its core, ESG is a framework for evaluating risk in these three areas of business. Besides the political controversy over being “woke,” another issue with ESG funds is greenwashing, whereby the level of due diligence and scrutiny of the companies is sub-par, or an ESG name was slapped on without regard to the actual risks underpinning the companies in the fund. If you come across these funds, you’ll need to do some extra research.

As I’m researching funds on Morningstar, I always take a peak at the Sustainability page to see how green or sustainable they have judged a given fund to be. Next, I enter the ticker symbol into AsYouSow.org and check the report card for that fund.

One fund to start with researching is FITLX. 

Step 3: Consider Thematic Funds

As we move along the spectrum from avoiding bad companies and risk evaluation to actually making a positive impact with investing, I’d put thematic funds next. You’ll typically find these as ETFs (Exchange Traded Funds), which are traded like stocks throughout the day and allow limit orders, but contain a basket of companies like a mutual fund. 

Thematic ETFs may be focused on solar power, wind energy, clean water, hydrogren power, women CEOs, or companies making products for vegetarians and vegans, among many others. Again, be sure to research to ensure it’s the right investment for you. 

Some ETFs you can check out are: FAN, TAN, WCEO, VEGN

Step 4: Take the next step: Active and Impact Investing

First, let me say, it’s difficult, if not impossible, for an individual to be an impact investor in public equities. It is possible to be an activist investor in public stocks, and it’s possible to be an impact investor in bonds in the public market. But, really, most impact investing happens in the private sector. 

The ways individuals can become activist investors are growing and becoming easier. Shareholders can vote in Annual General Meetings (AGMs), even potentially soon through their 401K, to push companies towards or away from certain policies and reporting obligations. Writing a proposal to be voted on in AGMs is also a possibility for individual shareholders. For those satisfied to have someone else take the lead, there are so-called impact funds whereby the fund representative will engage with company leadership, speak at AGMs, and lead other initiatives that represent shareholders’ values. 

A few of the asset managers who are active in company selection and corporate engagement are: Nia Impact Capital, Domini Impact Investments, and Impax Asset Management. 

When it comes to bonds, choice of bonds and projects is typically the most leverage an investor has. This may mean investing in muni bonds to build schools, green bonds for clean energy projects, special bonds for affordable housing, and other options. Admittedly, these can be hard to find and to evaluate, so working with a financial advisor is helpful here. 

Finally, most true impact investing happens in the private sector. Firms that specialize in this usually have more ability to negotiate what types of projects they’re funding, deal terms including whether they expect market rate or concessionary returns, what impact metrics they’re looking for (people, environmental, social, etc), timelines, and more. This could be a whole post on it’s own, so instead, I’ll refer you to this book: The Power of Impact Investing: Putting Markets to Work for Profit and Global Good.

Step 5: Don’t Forget Your Cash

If all of this sounds too overwhelming, or meant for someone with more money invested than you’re working with, don’t fret. One of the biggest ways you can take a stand with your money is by where you bank. 

The big 4 US banks — Chase, Citi, BofA, and Wells Fargo are also the top US funders of fossil fuel extraction. So, consider switching to a local bank, credit union, or other CDFI (Community Development Financial Institution) that is more likely to use your deposits to make loans to local communities, entrepreneurs, or environmental sustainability projects. 

Here are some places to get started: Bank.green, mightydeposits.com, climatefirstbank.com, and my earlier post on community-minded banking.

The move towards more ethical investing doesn’t need to happen all at once or even include a large part of your portfolio. Starting small with just a few dollars can be all you need to keep learning more and begin feeling better about how your money is invested. And, if nothing else, look at where you bank, and how you’re spending your money.