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Does ethical investment help solve the world's problems?

Does ethical investment help solve the world's problems?

It may be a bit of a lofty question, but it’s worth asking just how effective ethical investment actually is in helping change environmental and social concerns for the better.

As opposed to going plastic- free or using more public transport, for example, it can be hard to see the real world impact of investing ethically. So, just how much good are you doing the world by putting your money into a low- carbon or socially conscious investment?

A study from Swedish investment firm Nordea found that moving your savings to sustainable funds can be 27 times more efficient in improving your personal carbon footprint than eating less meat, using public transport, reducing water use and flying less, combined.

How they arrived at this figure can be found here.

Taking climate change as an example, the International Panel on Climate Change (IPCC) outlines the necessity of limiting global temperature warming to no more than 1.5 degrees. In order to do this, the single most effective thing that can be done is a global transition away from energy reliance on fossil fuels to renewables. 

Most people don’t think about how their money is invested or used by their banks. The way the global financial system is at the moment means that this money is being used to finance fossil fuel extraction and other questionable activities. The sad fact is that most people’s savings are being used to destroy the earth.

This doesn’t have to be the case- just a few changes means that your money can be used to finance the sustainable transition, and into companies that have much more ethical practices than some others. So just how can you use your money to make a difference?

Additional Finance for Sustainable Investments

The most obvious impact from investment is the extra money that goes towards the company or project. A direct investment into such a venture has a direct effect: such as building a wind turbine, or supporting entrepreneurs that provide employment. In financing positive impacts, your money is having a much better effect than it might otherwise; either doing nothing, or worse, if it's sitting in a bank that finances negatively impactful projects such as fossil fuel extraction.

The Impact of Investment in the Stock Market

Most money, however,  is invested into shares of companies listed on the stock market. Without getting too technical, the stock market is a secondary market, meaning that the money invested doesn’t usually go directly to the company. In this case, what use can an ethical investment in the stock market have?

  • Signalling: A company’s share price is a barometer of the overall strength and health of the company. If the share price increases, the management can be considered to be doing a good job and will therefore receive more support from the board in its ongoing strategy. Investing into companies that are providing positive solutions will continue their development. 

  • The reverse of this is also true. If enough investors avoid investment into certain companies (which is increasingly happening), this can depress a company’s share price. This can lead to pressure on the company’s management and force strategic changes. 

  • Access to finance: If a company’s share price is performing well, they can access cheaper finance to help with their growth plans. Contrastingly, poor share price performance can make access to finance more expensive and difficult for companies, which could halt some projects.

 

  • Active ownership: As a shareholder in (and therefore an owner of) a company, you have a say in how it should be managed. Most of the time this say is exercised at the company’s AGM, when they vote on specific items that shareholders or the company puts forward. You can exercise this vote, or more commonly, your fund manager does this on your behalf. It is therefore important to select a fund manager that engages with companies in a way you approve of. Many active ethical funds concentrate a lot of their efforts on speaking to the companies they own.

 

In short, a simple change to how your money is invested can go from financing fossil fuel extraction, to developing the transition to a more sustainable world. 

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