Traditional investment models have long prioritized financial returns above all else. However, mounting evidence suggests that companies adhering to ethical, social, and governance (ESG) criteria often outperform their counterparts long-term.
According to a 2020 study by Morningstar, sustainable funds generally outperformed traditional funds. This applies across multiple asset classes and geographies over short and long time frames.
For students stepping into the world of investing, making money while making a difference is appealing. However, it can also be overwhelming.
Before we dive into how students can get into ethical investing, let’s first have a clear understanding of the concept.
What is ethical investing?
Ethical investing is the conscious allocation of capital toward investments that align with the individual’s ethical beliefs and social values.
Ethical funds commonly avoid investing in companies involved in the tobacco, gambling, and fossil fuel industries. Instead, there’s a conscious choice to invest in companies that promote environmental sustainability, social equality, and corporate governance.
The objective is to generate financial returns while considering the long-term impact on society and the environment.
So why does ethical investing matter?
There is growing evidence that ethical investing doesn’t have to come at the cost of financial performance. A meta-analysis found either a positive relationship or no significant difference between ESG criteria and corporate financial performance.
Based on over 1,000 studies between 2015 and 2020, 58 percent showed a positive link between ESG and financial performance. The study also found that ESG integration as an investment strategy performs better than negative screening approaches. It also provides downside protection, especially during a social or economic crisis.
Companies that follow ethical guidelines are often seen as safer bets for investors.
If a company makes ethical choices—like reducing its environmental impact or treating employees well—it’s likely being well-managed overall. Good management often means the company is less risky to invest in, which can be attractive for investors.
Meeting the demands of a new generation
Ethical investing empowers individuals to align their financial activities with personal values and beliefs. It’s like effectively ‘voting with their dollars’ to support causes and principles they hold dear.
The younger generations are pushing the boundaries of what they expect from the companies they interact with. This expectation extends to their investment choices.
In 2021, millennials invested over $69 billion in funds focusing on ethical and sustainable practices. This growth is expected to continue significantly as millennials and Gen Z gain wealth.
By 2025, about a third of all managed investment money globally will be in ethical funds. The market for these kinds of investments could reach $160 trillion by 2036, a considerable increase from $30 trillion in 2018.
Why Students Should Care
You might wonder why, as a student with limited funds, you should care about ethical investing.
The answer lies in the power of compounding effects. Even a small amount invested today can grow significantly over time. Even if you start with a modest sum, you’d be surprised how much it can grow over the years.
Now, let’s add the ethical layer to this. Ethical investing means you’re not just looking out for your future self. You are also actively participating in shaping the kind of world you want to live in. In other words, you’re funding the ‘good guys.’
Being a student is also a crucial period for developing financial literacy. Investing wisely at this stage sets you up for a more secure future and instills a sense of financial responsibility. When you integrate ethical considerations into this learning process, you’re adding a layer of social responsibility to your financial knowledge.
You may feel that your investment as a student may be insignificant. However, the social influence you wield can be significant. You could inspire others in your social circles and family members to do the same. Thus, your small individual impact could multiply into a more substantial collective impact.
Where To Start: Building Your Ethical Portfolio
Here’s how you can impact change with your investments:
Kickstart your journey into ethical investing by first understanding what values matter most to you. Are you passionate about climate change, social justice, or corporate governance? Once you identify your core values, you can look for investment options that align with them.
One helpful approach is to use ESG ratings from reputable agencies. These ratings can show how companies and investment funds stack up against ESG criteria.
Choose the right funds
After you’ve done your research, decide where to invest your money. There are various options tailored to ethical investors. Index funds that track ESG indices offer a low-cost, diversified way to invest sustainably.
Alternatively, you might opt for mutual funds focused on companies that excel in sustainability. Green bonds, which finance eco-friendly projects, are another excellent option.
Your work isn’t done after making the initial investment. Monitor your investments’ financial and social returns. Are they performing well in the market? Are they making the impact you hoped for?
These evaluations are vital because they help you understand whether your investment choices achieve your intended goals. If not, it may be time to reallocate your funds or reevaluate your strategy.
Consult a financial advisor
If you’re a beginner in investing, the array of choices and jargon can be overwhelming. In such cases, consulting a financial advisor with expertise in ethical investing can be incredibly helpful. When you open a student bank account, ask investment officers for advice. They can guide you through the complexities of building an ethical portfolio.
Invest in a Better Tomorrow
Investing is more than about growing your financial assets. You also want to contribute to a vision of the world you’d like to see. As a student, you’re at the threshold of myriad opportunities, and ethical investing can be a rewarding journey, personally and financially. Take the next step, align your investments with your values, and participate in the change you wish to see.