Best Brokers For Ethical Investing
Finding the best brokers for ethical investing is one of the most direct ways we can contribute to positive change in the world. Ethical investing is an umbrella term for all approaches to investing whereby trading can be both socially and environmentally responsible.
While fighting climate change and making changes to our lifestyle may seem a daunting task, technological advancements enable traders to support sustainability efforts. Using the best ethical investing brokers will help you invest your capital in green stocks, renewable energy, clean water and much more. In our review of the best brokers for ethical investing, we explain what it is, its pros and cons and the types of ethical investments you can make.
What is Ethical Investing?
Before comparing the best brokers for ethical investing, let us first define the term. Ethical investing refers to the practice of aligning your moral compass and ethical values (environmental, social, political, religious, etc) to your selection of securities investing. The term encompasses all approaches to investing that consider ethical principles as well as profits. Ethical investing is entirely subjective, depending on a trader’s views.
Ethical investing often aims to stop traders from profiting from activities that may be considered harmful to society and the environment. It encourages traders to invest in companies, projects, funds and other assets that are committed to sustainable operations and consider issues like climate change, gender equality, animal testing, firearms and gambling, for example.
Typically, the best brokers for ethical investing filter out harmful activities (negative screening) and seek out those investment options that are committed to making positive changes and impacts through their environmental, social and governance (ESG) practices (positive screening):
- Negative Screening – Finding ‘sin stocks’ that are involved or primarily deal with unethical or immoral activities, such as tobacco, gambling, weapons and adult entertainment, as well as issues like intensive farming, deforestation, genetic engineering and poor human rights.
- Positive Screening – Aiming to identify companies showing commitment to improving their environmental impact, corporate ethics and social justice.
Types Of Ethical Investing
This practice has lots of variations, even within just one of the best brokers for ethical investing, including green, socially responsible, impact and ESG investing. While most of these centre on the same idea and are often used interchangeably, we have explored them in more detail below:
Green investing specifically focuses on the environmental impacts of businesses and their commitment to the reduction of pollution and greenhouse gases, the conservation of natural resources and other environmentally friendly practices. Traders can buy green indices, ETFs, bonds and mutual funds or hold stocks in environmentally-conscious companies that support green initiatives. Pure-play green investments are those that generate all or most of their profits from green business activities.
Green business activities can be companies engaging in renewable energy research, developing eco-friendly alternatives to plastics or seeking to reduce pollution and the environmental impact from their operations.
This can be split into three categories, dark, medium and light green investing. Dark green investing is a strictly screened approach, avoiding any company or industry that does not meet the criteria, whereas light green investing seeks companies that are doing good rather than excluding companies that are considered to cause harm. Medium green approaches are a combination of the two.
ESG stands for Environmental, Social and Governance and is one of the most common forms offered by the best brokers for ethical investing. It is a form of ethical trading that considers an investment’s financial returns as well as its behaviours. Their impact on the world is measured using a score based on the following principles:
- Environmental – How a company impacts the environment can include its carbon footprint, biodiversity, climate change policies and goals, renewable energy usage and even employee benefit programs like cycle to work schemes.
- Social – Social factors are concerned with stakeholder relations. This could include a company’s commitment to racial and gender equality, diversity and inclusion programs, community development, charity work and ethical supply chain sourcing.
- Governance – Governance refers to a company’s board and management team. Issues range from reasonable executive compensation, protection of shareholder rights, the diversity of directors i.e., gender division, plus litigation history and relationships with regulatory bodies.
Socially Responsible Investing (SRI)
Socially responsible investing (SRI) does what it says on the tin: it is an investment that is considered socially responsible based on the nature of the business. SRI actively eliminates ‘sin stocks’ or selects investments according to specific ethical guidelines, like the ESG scoring system. The best brokers for ethical investing of this form blend positive and negative screening to capture the best of both worlds.
Socially responsible investments usually mimic the current social, economic and political climate. Therefore, the investments may suffer if something changes within that climate. Traders should be aware that just because an investment is socially responsible does not mean that it will provide investors with a good return.
An example of SRI is community investing, which goes towards companies that have a track record of helping the community but have also been unable to generate funds from other sources like financial institutions. By investing in these types of companies, they can continue to provide services to communities like affordable housing and loans, without depending on governmental assistance.
Impact investing is a method that delivers measurable social and/or societal effects and benefits, alongside financial gains. The best brokers for ethical investing of this type focus on generating specific social or environmental outcomes whereby investments are put into market segments dedicated to solving certain issues.
A basic goal of impact investing is to help reduce the negative effects of business activities on the social environment and can often be considered an extension of philanthropy.
Using impact investing as a strategy involves considering a company’s commitment to corporate social responsibility (CSR). Impact investing is mostly done by institutional investors such as hedge funds, banks and pension funds. Traders may choose to invest their money into emerging or developed economies and an array of industries including agriculture, education, energy (particularly clean and renewable), and healthcare.
Ethical Company Stocks
The best brokers for ethical investing will allow you to invest in companies with strong environmental commitments, which is the simplest and most popular form of ethical investing. Many new start-ups are seeking to develop alternative energies and greener materials, while established companies are betting on a low-carbon future. It can be time-consuming to pick stocks and keep track of their performance and green credentials.
However, it results in a bespoke portfolio that matches your sense of what is ethical and important.
Top ethical stocks to invest in can include Tesla, which has reached high valuation by targeting environmentally-conscious consumers. Salesforce also does well on ESG criteria as it has maintained net-zero greenhouse emissions since 2018 and is over half the way towards its 100% renewable energy by 2022 target. Other top investments include 3M (MMM), Colgate-Palmolive, and Kimberly-Clark.
Several indices seek to track environmentally favourable and sustainable businesses. Some organisations have created ethical indices that calculate benchmarks whose underlying is selected based on ESG criteria.
The starting point is a traditional index to which filters are applied (negative or positive criteria) to eliminate companies that do not satisfy social responsibility criteria. The investment spectrum will be filtered to a greater or lesser extent depending on the stringency of the SRI or ESG policies applied. Features like capitalisation, sector and geographical diversification are nearly always retained to give financial credibility to the index.
For example, the NASDAQ Clean Edge Green Energy Index and the MAC Global Solar Energy Index both target the renewable energy sector. The Dow Jones Sustainability Index (DJSI) was launched in 1999 and the FTSE4Good index was designed to measure the performance of companies that comply with recognised global sustainability standards.
These are two of the most well-known ethical investment indices for UK companies. The MSCI indices are global benchmarks that exclude companies operating in certain business segments that investors might prefer to avoid and includes companies with high ESG standards. The best brokers for ethical investing through indices will offer a wide range of such assets to allow clients to specialise or diversify their portfolios within the boundaries of their beliefs.
There is estimated to be more than £19 billion invested in ethical funds in the UK and $80 billion globally. Mutual funds, ETFs and index funds can provide wider exposure to ethical companies. Ethical funds that invest in renewable energy companies, for example, allow traders to support new technologies while perhaps tapping into any potential growth.
Ethical funds are provided by asset or investment management firms. They apply negative and/or positive value-based screening to help sift through socially responsible investments.
There has been a lot of attention on Bitcoin’s environmental impact recently, so some of the best brokers for ethical investing have been looking for ways that crypto traders can find the best of both worlds.
Bitcoin relies on the proof of work verification system for its blockchain, involving huge numbers of calculations and amounts of processing power to produce a single coin. While efforts are being made to reduce the digital currency’s carbon footprint, traders have started looking for greener options. Cryptocurrencies that use a proof of stake system, for example, use far less energy.
Smaller cryptos have a lower energy footprint as they involve fewer daily transactions, while some are just generally more energy efficient. Below we have listed some more sustainable cryptocurrencies:
- Cardano (ADA) – developed by the co-founder of Ethereum, ADA uses proof of stake and is, therefore, more energy-efficient
- BitGreen (BITG) – founded in response to the environmental impact of BTC. Users can earn BITG by carpooling and buying sustainable coffee.
- SolarCoin (SLR) – this platform aims to incentivise real-world environmental activity: verifiably produced solar energy
Pros Of Ethical Investing For Traders
There are many obvious advantages of using the best brokers for ethical investing:
- Grow Savings Responsibly – ethical investing means that you can maintain your values while trading. Investors can feel happy when an ethical investment performs well when that investment reflects their moral values.
- Portfolio Quality – the additional analysis of companies involved in ethical investing means that you can improve the quality of your portfolio with better-managed companies and/or assets. Also, taking into account societal shifts like climate change concerns will give traders exposure to growing industries and technologies.
- Avoid Volatile Assets – by excluding some types of investment, your profits may be less exposed to volatility. For example, if your portfolio excludes oil and the price of oil falls dramatically, you will be less likely to be affected.
- Encourages Further Sustainability – as ethical investing gains more importance and social prominence, it will encourage other businesses to improve their ethical practices.
Cons Of Ethical Investing For Traders
Despite making a positive impact, even the best brokers for ethical investing has some drawbacks:
- Potential For Less Growth – choosing an investment based on ethical preferences is not indicative of the investment’s overall performance. Excluding sectors for their harmful practices could increase the likelihood that you will miss out on growth and opportunities.
- Labour Intensive – ethical investing is not a passive strategy and requires a lot of research, especially without the assistance of a financial advisor or investment fund. Picking and choosing which ethical investments to make can be very time-consuming.
- More Expensive – constantly changing your investments in line with ethical standards can damage your overall profit when you consider transaction costs. Financial advisors and investment funds could also charge high fees.
- More Risk – sometimes, choosing ethical companies or funds means investing in those that are in their earlier stages of development with lower revenues.
Final Word On The Best Brokers For Ethical Investing
Ethical investing is a growing phenomenon among traders as it balances earning profits with making positive environmental, ecological, political and social changes in the world. From an investor’s point of view, buying stocks in companies that fit into ESG criteria is a simple way to make a difference but doing the research can often be time-consuming. Using an ethical investment fund or a broker for ethical investing is a simpler way but is an expensive option.
How Can I Invest Ethically?
Before getting involved with the best brokers for ethical investing, some research is required. Firstly, consider what you are passionate about. Choose an issue (or several) that you care about as this will help narrow your search for investments. Next, choose an approach: do you want to exclude certain sectors completely, invest in problematic companies to improve their operations or invest your money into finding solutions. Following that, you need to pick a fund, asset or company by checking their mission statement to see if your values are aligned (or not) with theirs.
Is Islamic Trading A Type Of Ethical Investing?
Yes, Islamic trading accounts are a popular example of a religious-based approach, offered by many of the best brokers for ethical investing. The main attraction of brokers offering Islamic accounts is that it allows those who follow Sharia Law to trade on the markets without breaking with their faith. It also allows traders to stay true to their morals and ethics, avoiding investments involving alcohol, pork, gambling and other forbidden items.
How Do Ethical Investing Returns Compare?
No investment method or strategy is guaranteed to generate more or fewer profits than another. The performance of ethical funds is similar to that of traditional funds, if not somewhat better, and the greater depth of research and analysis of companies may mean that you invest in better ones. However, excluding certain industries may also limit your growth prospects and diversification opportunities.
What Is The Difference Between ESG Vs SRI Vs Impact Investing?
ESG investing has set criteria, looking at a company’s environmental, social and governance practices while also using more traditional financial measures to enhance analysis. Socially responsible investing involves negatively screening companies or excluding certain investments based on personal ethical criteria. Impact investing is focused on generating specific social or environmental outcomes and investments are put into market segments dedicated to solving certain issues.
Who Are The Best Brokers For Ethical Investing?
Interactive Brokers have ESG scores on all its platforms and you can receive alerts where ESG news may affect the scores of the companies you are investing in. With OpenInvest, you can declare what you care about most, whether that is climate change or social equality, and they will handle your investments accordingly. Ellevest is a platform built “for women by women” that considers the reality of women’s lives, including the gender pay gap. With its impact portfolio, traders can invest in women in leadership, sustainable practices and community development.