Dictionaries list several different definitions for the word "ethics." The primary definition is a system of moral principles, and a secondary definition is that ethics are the rules of conduct as used by a specific group or culture. The final definition of ethics is a branch of philosophy dealing with values relating to human conduct, with respect to the right and wrong of certain actions and their respective motives and consequences.
The proper application of ethics to investments is a highly subjective topic that can raise some difficult questions for both investors and regulatory agencies. It does bring up the question of why business ethics are important.
The Ethical Puzzle
Although the definition of ethical investing could be stated as simply purchasing investments from issuers who act ethically, investors who seek to achieve this must first establish a set of criteria that can be used to determine what actions and practices are considered ethical to them. For example, the Bible and other religious books provide rules and principles for people to live by, and those who believe what those books say use them as guides to evaluate things in the world around them.Religious texts and other moral teachings, however, do not always provide crystal-clear guidance for practical investment decisions.
Although creating or finding the ethical criteria to use as the basis for evaluating investments may often be relatively simple, effectively applying that criteria to actual investment choices can be more difficult. For instance, the Bible condemns drunkenness in several passages, but does this then make it unconditionally wrong to purchase securities issued by makers of alcoholic beverages? Since not all consumers of alcohol get drunk, then the investor will have to decide for him or herself whether this investment truly supports immoral behavior. Virtually all issuers of securities or investments most likely do something that at least a substantial percentage of their investors do not approve of (how many investors who buy Treasury securities approve of everything that is done by the government?). Of course, this begs the question of which practices and policies are tolerable for investors and which are not.
Ethical Issues
Although the values and beliefs that guide ethically minded investors differ somewhat for each person, there are several specific areas where ethics play a major role. Some of the more notable issues that investors examine from an ethical standpoint include:
Winning at Someone Else's Expense
Although there will inevitably be both winners and losers in a free-market economy, the issue of how a company wins is a concern to some. Companies that have monopolies in a market or industry can function very efficiently in many respects. Still, they also effectively prevent any form of healthy business competition, and some investors consider this to be unethical.
Environmental Responsibility
Heavy industries such as energy and manufacturing have long been perceived as destroyers of nature and wildlife with their pollution and decimation of forests, oceans, lakes,and rivers. Ethical investors favor companies that replace what they take from the earth and adhere to governmental standards for emissions.
Abortion and Stem-Cell Research
Companies that profit from certain medical procedures or types of research are often considered to be unethical or even criminal by those in the Judeo-Christian community.
"Sin" Industries
Although the concept of an industry being sinful is obviously somewhat subjective, a portion of the investing public still considers makers of alcoholic beverages, tobacco companies, casinos,and the p*rnography industry to be taboo. The tobacco industry, for instance,has long been accused of targeting teenagers as customers and making its products as addictive as possible to fuel sales. Whilesin industries have made efforts to raise public awareness of the dangers of misusing their products and services, some investors may choose to avoid companies that operate in these industries.
Socially Conscious Investing
Many investors who seek to avoid what they consider to be unethical investments look to vehicles such as socially conscious mutual funds that screen companies according to specific ethically-based criteria. Many such funds are offered by religious denominations such as the Lutheran Brotherhood, which typically avoids investing in any of the "sin" industries listed above and can provide investors with a clear conscience in this area.
Other Considerations
Of course, the ability of investors to make informed ethical choices is dampened by the quality of information that they receive. For example, the accuracy of emissions and other environmental reports that are issued by major conglomerates such as Exxon may besuspect, and the data published by other companies such as Enron and WorldCom that were found guilty of major accounting fraud was false.
The Bottom Line
Ethics are morally subjective by nature, and there is no absolute standard for what is or is not an ethical investment. Investors must ultimately decide for themselves what they consider to be ethical and then try to apply that to their investment choices. For more information on ethical investing, consult your financial advisor.
FAQs
Ethical investing gives the individual the power to allocate capital toward companies whose practices and values align with their personal beliefs. Some beliefs are rooted in environmental, religious, or political precepts.
What is an example of ethical investing? ›
Ethical investing is for investors who want to invest their money for noble causes. For example, if an investor thinks that tobacco is unhealthy, then they would avoid companies that produce tobacco or own investments in tobacco-manufacturing companies.
Can investing ever be ethical? ›
Ethical investing strives to support industries making a positive impact, such as sustainable energy, and often aligns with ESG investing. Of course, what is “ethical” depends on the person. What is ethical to you may not be to someone else.
Why is ethics important to investors? ›
A strong ethical culture that helps honest, ethical people engage in ethical behavior will foster the trust of investors, lead to robust global capital markets, and ultimately benefit society. That is why ethics matters.
What are the ethical investing standards? ›
There are 5 main types of ethical investing: ESG (environment, social, and governance), socially responsible, sustainable, impact, and moral.
What is unethical investing? ›
Key Takeaways. Unethical investing refers to investing in companies that engage in questionable business practices. Companies that sell products that are known to be harmful, such as tobacco and alcohol, can be unethical companies.
Why do we invest ethically? ›
MOTIVATIONS FOR ETHICAL INVESTMENT
Traditional tniance theory and the ethical invest- ment literature together suggest three potential reasons people may invest some or all of their funds ethically: For superior financial returns. For non-wealth returns. To contribute to social change.
Is Warren Buffett an ethical investor? ›
Buffett believes his top priority is to maximize shareholder value. Buffett is an outstanding CEO, prominent philanthropist, and by no means an unethical person. But, his investment strategies are outdated, allowing him to invest in unethical markets, companies, and industries.
Are 401k's ethical? ›
Most 401(k) retirement plans aren't automatically engaging in socially responsible investing, and many might not even offer sustainable investing choices at all. Furthermore, there are questions about the contents of environmental, social, and governance (ESG) investing and other such options.
Which asset is the most liquid? ›
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.
Investors cited that their growing interest in sustainable investing is due to factors including new climate science findings (53%) and the financial performance of sustainable investments (52%). A majority of investors also believe that companies should address environmental and social issues.
What is the code of ethics? ›
: a set of rules about good and bad behavior. The company has its own code of ethics.
What is the ethics of finance? ›
Ethics in finance is the framework of moral principles and standards that guide individuals and institutions in the financial industry. It aims to influence their decision-making and conduct.
Is ethical investing possible? ›
Ethical investing gives the individual the power to allocate capital toward companies whose practices and values align with their personal beliefs. Some beliefs are rooted in environmental, religious, or political precepts.
What are the ethical issues in investment? ›
Here are just a few examples of the ethical issues you may face when investing.
- Winners and losers. ...
- Healthy competition. ...
- Environmental responsibility. ...
- Sin stocks. ...
- Religion. ...
- Socially conscious.
How to build wealth ethically? ›
Wealth building guided by moral ethics involves making decisions and conducting business in a manner that aligns with fundamental principles such as integrity, honesty, and social responsibility. This approach transcends the pursuit of immediate financial gains, fostering trust, credibility, and long-term success.
What is the best ethical investment? ›
Best-performing ethical investment funds
Fund Name | Return |
---|
Intelligent Investor Ethical Share Fund (Managed Fund) (INES) | 24.62% |
Russell Australian Responsible Investment (RARI) | 23.02% |
SPDR S&P/ASX 200 Esg (E200) | 21.10% |
Vanguard Ethically Conscious International Shares (VESG) | 20.59% |
5 more rowsMay 2, 2024
What is an example of ethical purchasing? ›
4 Types of Ethical Buying
- Positive Buying. Favouring particular ethical products, such as energy saving lightbulbs.
- Negative Purchasing. Avoiding products that you disapprove of, such as battery eggs or gas-guzzling cars.
- Company-Based Purchasing. ...
- Fully-Screened Approach.
How to do ethical investment? ›
To identify your ethical priorities, consider the issues that matter most to you, such as climate change, human rights, or animal welfare. Use these as a basis for your investment decisions and develop an investment strategy that aligns with your values.
What are the principles of ethical investing? ›
The primary goals of ethical investing include promoting sustainable business practices, supporting social and environmental causes, and generating competitive financial returns that align with investors' values.