Ethical and sustainable investments and why it pays to know the difference (2024)

High-net-worth investors can often think that ethical and sustainable investments are one and the same thing. However, they are two distinct approaches to investing that prioritize different aspects of social responsibility. While there is overlap between the two concepts, they focus on different areas and have different objectives. As a high-net-worth investor interest in this area, it is important to know the differences between the two.

Ethical investing, also known as socially responsible investing (SRI), involves selecting investments based on ethical considerations and personal values. The primary focus of ethical investing is to align investment choices with specific moral or ethical principles. This approach aims to avoid investments in companies or industries that are involved in activities considered harmful or unethical, such as tobacco, weapons, gambling, or fossil fuels. Ethical investing typically involves a values-based screening process, where investments are assessed based on certain criteria, such as environmental impact, labour practices, corporate governance, or diversity and inclusion.

Sustainable investing, also known as impact investing or environmental, social, and governance (ESG) investing, takes a broader approach and considers the environmental, social, and governance factors of investments. The goal of sustainable investing is to generate long-term value by investing in companies that demonstrate sustainable practices and responsible business conduct. The primary goal of sustainable investing is to generate positive, measurable, and sustainable impact alongside financial returns. Investors who practice sustainable investing seek to allocate their capital to companies and projects that promote sustainable practices, have a positive social impact, and maintain high standards of corporate governance. The objective of sustainable investing is to integrate sustainability considerations into investment decisions in order to achieve financial returns alongside positive environmental and social outcomes.

Many high-net-worth investors choose to do both types of investing. However, what is most important to understand is sometimes there can be a clash between the two principles. For example, you might invest in a company that makes carbon fibre which in turn makes aeroplanes lighter, which means they burn less fuel (a big tick in the sustainability box). However, what if that carbon fibre was made in a factory which employed child slave labour? Although the investment is sustainable, most people would argue it is unethical. I know this is an extreme example, but it is a useful to demonstrate that something might be sustainable but not necessarily ethical.

So, while ethical investing focuses on aligning investments with personal values and avoiding investments that conflict with those values, sustainable investing takes a broader approach by considering a company’s overall sustainability and impact on the environment, society, and governance. Both approaches seek to generate financial returns while making a positive contribution, but they prioritize different aspects of social responsibility. If you are not careful, they can clash. Having a clear, well documented, investment strategy will help you navigate these situations. If you would like to know more about ethical and sustainable investing for high-net-worth investors, please contact us here.

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General Advice Warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. We strongly suggest that you seek professional financial advice before acting.

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