ETHICAL INVESTING: ITS ADVANTAGES AND DISADVANTAGES
Believe it or not, ethical investing comprises a huge emotional component. Investors are human; therefore, they let emotions drive their decisions. In most cases, when a company supports various noble causes, it can lead to a better stock performance and returns on a portfolio, as well as benefits all the shareholders. Conversely, if an entity breaches one of its core values, it can result to disappointment (on the investor’s part) and large losses.
Ethical investing is a sound choice if an investor already observes strict adherence to a certain belief system. Yes, the decisions made by big companies create a much bigger impact than your decisions. But it is not sensible to invest in a firm with principles not aligned with yours.
Majority of socially responsible investors admit it is difficult to find corporations that meet their criteria. So, it is important to draw the boundary on choosing what is important for you and what you are willing to compromise. With ethical investing, you are bound to make the hardest decisions, such as forgoing high returns to uphold your views.
Ethical investors tend to screen out some high performers if they do not meet their environmental, governance, or social criteria. But it does not necessarily mean they will earn lower returns by sticking to an ethical investing strategy.
However, looking for the right investments entails exerting more time and effort. You need to do extensive research and gather figures to come up with the best investment decisions. Upon finding the right investments you want, you have to monitor those to ensure they meet the ethical and financial goals expected from them. If you find this investment style too tedious, might as well switch back to conventional investing and just donate a particular percentage to charities close to your heart.
Socially responsible investing is the road less traveled. Being a small part of the general market, most traders do not decide right away what to buy or sell according to the same criteria ethical investors use. Nevertheless, it is up to you if you still want to trek this direction.