What Is Ethical Investment in 2021
And will this type of investment be profitable for you in 2021?
Before turning to the issue of profit, let us define what ethical investments are. Based on the name itself, the term is a practice that stands on ethical and moral principles when choosing a project for your investment. This is what is now also commonly referred to as a socially responsible investment.
What kind of investments cannot be called socially responsible?
And before we talk about where to invest, if you want your investments to be called socially responsible, it is necessary to say that is not an ethical investment. So what is not an ethical investment? For starters, if you initially have doubts about whether a particular investment will be ethical or not, it will likely be unethical. Of course, your investments are not divided into “ethical” and “unethical” only. There is also several investments that cannot be called socially responsible simply because they don’t fit this definition, but which are not unethical.
But there are also specific answers. For example, alcohol and tobacco products are quite controversial investments, and if you invest in this very thing, despite the profit, such investments cannot be called socially responsible.
The environment is also an important factor: do you invest in fossil fuels or in funds that invest in fossil fuels? If your answer is yes, then such investments will not be called ethical.
If you choose the fund in which you want to invest, you should take a closer look at the selection and exclusion policy of the fund. Otherwise, your investments may go into unethical sectors, such as arms.
What is ESG?
So, what is an ethical investment? Ethical investment can include companies that are guided by the ESG principle. As Forb s says, “ESG investing is making smart decisions that will perform well today and in the future”. The term ESG stands for Environmental, Social, and Governance Criteria: it is a set of standards that companies must meet if you want your investment to be considered socially responsible and ethical.
If you go a little further than a simple deciphering of the term, you can see exactly what factors are the profile here. So, if we talk about enviromental profile, according to S&P Global, the main factors here are reduction of gas and waste &pollution, as well as appropriate water use, and land use. Social profile in ESG consists of such factors as workforce&diversity, safety management, customer engagement, and communities. Last but not least, the Governance profile consists of such factors as structure&oversight, code&values, transparency&reporting, cyber risk&systems.
Of course, this doesn’t mean that you need to invest in something that simultaneously meets the three main profiles, the main principle is rather that all of the above factors haven’t been violated. The idea of what ESG means may vary from investor to investor, but the main thing is that ESG investments are undoubtedly ethical.
However, the main question remains: are ethical investments profitable, and will they generate income in 2021? The short answer is: yes, they are. Now let’s look at why and how profitable they are.
Let’s take a closer look
Starting to understand the reasons for the profitability of ethical investments, it should be mentioned that by investing in ESG-investments, you also gain a reputation as a responsible investor. But this is not your only benefit.
If your investment is in the European market, you win a lot as an ESG-investor. Especially if your focus is on green investments (which is of particular interest to me). According to the European Commission and European Green Deal, it is more profitable than ever to engage in sustainable financing. By 2050, Europe plans to become the first “climate-neutral continent,” and is working hard to do so, including by supporting green bonds. The European Commission is also considering selling eco-labeled debt to get money to rebuild the Covid-19, according to the Financial Times. In addition to the fact that different European countries — for example, Luxembourg — have already reduced the rate (or have already reduced the rate) of the annual tax on assets from 0.05% to 0.01% for funds with ESG.
Besides, the European Investment Bank will align all financial activities with the objectives of the Paris Agreement from the end of 2020. At the same time, the European Investment Bank stops supporting fossil fuel projects from the end of 2021. So the trend becomes very clear: Europe supports socially responsible investments, especially in the field of green investments.On the other hand, it is obvious that the common policy of the European Union is to make it comfortable for as few companies as possible to develop within the framework of a united Europe that do not care about the environmental impact of their activities.
And from this perspective, it is clear that green investments become more profitable in the long run, simply because unethical investments gradually become unprofitable.
But are there any risks?
Of course, as with any other investment, if you invest in ESG, especially in green bonds, there are certain risks. Perhaps the main risk here is the lack of liquidity: the green bond market isn’t yet large enough. However, according to statistics provided by S&P Global, the green investment index has grown steadily over the past ten years.
Summing up
So, ESG investments, and especially green bonds, are investments that are more likely to pay off if you look at your investment in the long term. However, the trend is that it is ESG investments that are increasingly supported — both by the government and the public. So your investment in ESG is first and foremost an investment in the future.
