How to Practice Ethical Stock Market Investing

Ethical investing is related to socially responsible investing (SRI) that focuses on integrating sustainable practices into the long-term value of an organization. Socially responsible investing recognizes that business strategies are directly related to social, economic, environmental and ethical factors that positively or negatively affect investment decision making. In this context, SRI aims at protecting social good while maximizing investment returns.

Fraud, greed and unethical behavior are prevailing in global capital markets. Transparency is being compromised by greedy executives who inflate share prices in order to mislead investors with impressive market caps. Even worse, in many companies, the market value per share is higher than the book value per share which is not justifiable unless the company is a leader on cutting-edge technologies or cures for chronic diseases. However, such investments are considerably rare. So, this leads to the conclusion that ethical investing is rather impossible.

Is it?

Well, ethical investing requires the close cooperation of an entire circle of professionals who need to act responsibly. Financial advisors, stockbrokers, traders, and any other professional involved in the business of investing need to disclose objective information, accurate sales estimates and justified shares prices by the market conditions.

The following are factors to consider when practicing ethical investing.

1. Address highly important social issues

The idea behind ethical investing is investing in companies that promote social responsibility by making positive contributions to society. For instance, if you take a strong stand for environmental issues, you favor investment in companies that are beneficial to the society and promote environmental protection, pollution control and/or recycling (positive screening) and filter out investments that are deemed to be ethically unattractive through the promotion of animal testing, alcohol or tobacco promotion and so on (negative screening).

At the same time, organizations need to decide what social issues they consider as “most important.” Considering that societal demands are becoming increasingly intense, organizations need to employ socially responsible practices to address these issues and fully capitalize on potential business opportunities. Often, prioritizing on social issues proves to be a critical factor for increased profitability through socially responsible investing.

2. Determine the level of accepted risk

Another key consideration is the level of risk that organizations accept in the context of ethical investing. New businesses may undertake a higher risk to achieve high growth quickly because they are not reputable yet and investors are not familiar with their business strategies. In contrast, organizations with a good reputation can accept a lower level of risk because they can take a long-term approach on investing, while achieving a slower, but steadier growth.

3. Employ long-term investment strategies

Organizations that are interested in ethical investing need to employ long-term rather than short-term investment strategies. In effect, more than 70 percent of a business’ value is generated by long-term cash flows. Therefore, employing long-term investment strategies allows organizations to create additional business value.

4. Adjust to the changing business environment

Organizations need to adjust to the constantly changing business environment. Technological advancements can facilitate responsiveness to changeling societal demands. In addition, multinational enterprises (MNEs) are better equipped to negotiate social responsibility issues, including climate change, poverty, or water scarcity.

Conclusively, ethical investing has been made possible as people are becoming increasingly aware of social and environmental responsibilities. Investment decision making incorporates investing in companies that promote activities or products with a positive impact on the stock market, while filtering out activities or products with a negative impact on the stock market. In this context, ethical investing is related to moral standards that drive investment decision making.