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One barrier to investing for some individuals is a resistance to providing more capital for the largest businesses to make a few individuals extremely wealthy, exploit workers or provide poor working conditions, or hurt humanity or the world at large based on their industry. An increasingly global economy creates many efficiencies that increase profits across the board, but it also does allow malicious actors to skirt regulations or hurt individuals without the opportunity to protect themselves.
Wanting to avoid using your dollars to support these behaviors is normal, but it can feel overwhelming to vet companies before investing. The act of vetting individual companies also feels much like stock-picking and loses much of the appeal of a passive total market investment strategy. There are trade-offs when it comes to building wealth and investing ethically, but building wealth without investing is difficult. It is worth identifying a balance that works for you so you can build wealth while feeling confident that your economic footprint is a net positive for the world.
What is Ethical Investing?
Ethical investing, also known as socially responsible investing or socially conscious investing, involves implementing an investment strategy at peace with your own ethical priorities. Investing ethically is not the same for everyone because everyone has a slightly different ethical code. Different individuals may practice ethical investing according to various political or religious beliefs, prompting their precise investments to vary significantly.
While the diverse approaches to ethical investing can be confusing, ethical investing generally involves two concepts. First, folks invest in industries that they believe will improve humanity or the world. Second, they avoid industries that they believe hurt humanity or the world. The idea behind ethical investing is to put your money behind industries that you believe promote the greater good rather than only seeking individual wealth.
How to Invest Ethically
The implementation of ethical investing depends on your ethical code, but it often includes avoiding investing in harmful drugs and chemicals, firearms and the defense industrial complex, fossil fuels, or other industries that produce harmful outcomes to humans and/or the environment. This is by no means a comprehensive list of potentially harmful investments, nor do you have to feel strongly enough about all of the industries on that list to avoid investing in them. I admittedly work in one of these industries, although in a niche I personally find more beneficial than harmful, so I clearly support taking a more nuanced view than completely removing any connection you have to any industry with potentially negative global effects.
But how can you avoid what you believe are the most harmful industries without analyzing individual stocks like you are a financial analyst for Goldman Sachs? There is a way! More ETFs (exchange-traded funds) and mutual funds designed to invest ethically now exist, allowing investors to take a more passive approach to investing while knowing their investments avoid particular industries. This means investors can avoid the dangers of individual stock-picking while investing ethically.
These ETFs and mutual funds designed with ethical investors in mind are called ESG (environmental, social, and governance) funds. Ethical investors can search for ESG ETFs that use a methodology most closely aligned to their own beliefs in order to receive a collection of investments that fit certain values without requiring individual stock research. Some ESG ETFs focus more on avoiding certain industries while others focus on investing in positive industries that can improve the world. Whether you prioritize investing in the most positive industries to effect change or prioritize eliminating the most negative industries, you can likely find an ESG ETF to get you started in ethical investing.
While both eliminating negative-impact industries and increasing investments in positive-impact industries are approaches to passive ethical investing, ethical investors still need to practice some caution in their selection decisions if they hope to invest passively. A passive investment strategy generally assumes that the investor is investing in a total market index fund. This detail is important because certain industries may experience hardship. Investing in the entire market is a bet that some industries will perform well enough to prevent the entire economy from crashing. This is a pretty safe bet over the long term because having a strong economy benefits everyone.
Some ethical investing strategies involve opting out of certain industries. If you invest in an ESG ETF that excludes weapons and the defense industrial complex and a war begins, spurring a wartime economy reliant on these industries to stay afloat, your personal portfolio will suffer. Of course, there are more serious issues than individual portfolios in a wartime scenario, but this is an easy example of how negating certain industries can impact your personal wealth.
This does not mean you should not eliminate industries you find harmful from your portfolio, but it is important to exercise caution in how much you eliminate. If you choose to invest heavily in only one or two industries because they encourage positive change, one of those industries crashing may hurt your financial position significantly. Diversification is still important when practicing ethical investing. Removing a particular industry will probably not hurt your portfolio too much to recover over your lifetime, but focusing too narrowly on the most positive industries without diversifying may prevent you from creating the wealth you need to survive.
Balancing the Wealth and Ethics Dilemma
Only investing in ethical funds, like ESG ETFs, carries risk. You will most likely not build wealth as quickly by avoiding significant portions of the economy or only investing in the most positive agents of change. That said, you can strike a balance between building wealth and using your wealth to create positive change.
I prefer Tori Dunlap’s approach to ethical investing: She suggests building your wealth with a diversified portfolio, most likely investing in a total stock market index fund to passively grow wealth. Once you create a basic foundation of wealth that gives you financial security, become more ethical in your investments. Donate heavily to causes that improve the world, and gradually allocate more money to ethical investments if you are continuing to earn money after establishing this baseline wealth.
To me, this means investing in a total stock market index fund heavily enough to achieve financial independence, by either hitting your FI Number or investing enough money that it will hit your FI Number by the time you plan to retire. Prior to hitting your FI Number, but after setting up basic financial security like an emergency fund and recurring investments to retirement funds, start donating to causes important to you. If you create a larger gap between the money you need to live and the money you need to maximize your retirement funds, start some recurring transfers in ESG ETFs. The process that makes you feel most comfortable may be slightly different, but strike a balance between verifying that you have financial security and investing ethically.
If putting off your ethical investing feels unethical to you, you can start earlier. That said, consider the impact you can have on the world if you have wealth. If you stick to your moral code but are unable to build wealth over your lifetime, you cannot create as much change as you can by putting your wealth behind the industries and causes that you believe make the world a better place. Whether we like it or not, money goes farther than stubborn speeches when it comes to effecting positive change. If you are struggling with this ethical dilemma now, just be sure to maintain your ethical code and gradually practice more ethical investing as your wealth grows. You will be able to make a greater net positive impact on the world if you build your wealth and commit to using it for good once you have it.
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