Ethical Investing: What is it and How to Do it

7 min read

Ethical Investing

What is Ethical Investing?

Ethical investing means doing the right thing when you invest. But what does that really mean? How can you inject an abstract concept like ethics into your concrete investment portfolio? In this article, we will walk you through the ethical investing process, starting from first principles, and explain how you can put together a systematic and authentic ethical investment portfolio.

The Golden Rule

If you want to answer the question of how to incorporate ethics into a portfolio, you must first define your values. What are the things that you care about? People generally believe that it is important to be kind to others and not destroy our planet. This should be no surprise – there is a single core moral concept underlying those values that transcends cultural and religious barriers, known as the Golden Rule: Treat others as you would like to be treated – don’t treat them as you would not like to be treated. Be kind to others; don’t hurt them. When people disagree about what is right and wrong, most of the time they aren’t disagreeing about the Golden Rule – they are disagreeing about how the Golden Rule is applied to their specific situation.

There is a simple story that helps to illustrate the logic behind the Golden Rule and how it applies to the companies that we all own in our investment portfolios: There are two factory owners, Allie and Beth, who live in neighboring towns. However, Allie’s Aluminum factory is located in Beth’s town, and Beth’s Bottle factory is located in Allie’s town. Allie’s Aluminum factory is polluting the air in Beth’s town, causing Beth to breath in toxic fumes. Beth’s Bottle factory is polluting the water in Allie’s town, causing Allie to drink dirty water. If Allie and Beth followed the Golden Rule here, and stopped hurting each other through their factories, this would not only be the right thing to do, but they would both be better off. It’s a no brainer. Allie and Beth, upon discovering their linked problem, arrange to meet and then agree to make the costly investment to eliminate their own factories’ pollution. Their willingness to cooperate and their successful coordination gives them clean air to breathe and clean water to drink.

Now lets zoom out from this story to today’s modern investment world. Instead of just two factory owners there are millions of stock owners. And instead of just two factories in two towns there are hundreds of thousands of major businesses operating in cities and towns all over the world. Instead of two kinds of pollution there are thousands of distinct impacts on customers, employees, and society. One person’s investment is another person’s pollution source. One person’s investment creates another person’s toxic product. One person’s investment is another person’s swindling employer.

A big part of ethics is the belief that if everyone subscribed to a certain way of thinking then this would make the world a better place. The Golden Rule as applied to investing in (and therefore owning) companies does seem to hold this promise. Imagine a world where socially conscious companies prioritize humanity by putting society, employees, and customers on par with the profits they earn for investors.

The goal of an ethical investment portfolio is therefore clear: Encourage companies to abide by the Golden Rule. An ethical portfolio can accomplish this goal in two ways. First, by investing more in those companies that are doing better from a Golden Rule perspective. Second, by engaging with companies to let them know how they can improve their standing in your portfolio, or maybe gain inclusion for the first time.

A company’s management team, frequently compensated by the value of their company’s stock, have a vested interest in making their company as investable as possible. The more a company’s shares are in demand, the more the price of the shares should rise. If this means meeting the standards of ethical investors like yourself, then management teams may very well begin to make their company more ethical – not just for you, but for other like-minded ethical investors as well.

Quantifying Your Portfolio’s Ethical Impact

The Golden Rule is a great place to start. But to apply it to the question of which companies you should include in your investment portfolio you need to measure a company’s impact on people to determine both how much good a company is doing for people and how much bad. That way you can invest more in the companies that are doing more good than bad (and not at all in those companies doing more bad than good). But this is tricky. How much does it matter that a company is providing thousands of jobs in an otherwise impoverished community as compared with the fact that its factory is polluting the drinking water of that same community? How much does it matter that a company is providing a fantastic service to its customers for an unbelievably low price compared with the fact that its investors are losing their shirts in the process? This is where reasonable people can begin to disagree. But it is possible to provide good answers to these questions by looking at all the different things that a company does to people and using the same yardstick to assess them so that we can make them comparable.

Using the same yardstick to measure everything is called quantification. There is a ready-made metric that can be used to quantify all the different impacts that a company has into comparable units of human suffering and human benefit: the U.S. dollar. We can use dollars to compare and add up dollars of profit for investors, dollars of employee value, dollars of customer value, and dollars of societal value to come up with a single dollar value that represents the company’s value to humanity, or its Humankind Value.

Using a company’s Humankind Value to help create an ethical investment portfolio turns out to be extremely useful. If a company is producing a lot of value for its customers, employees and investors, but is destroying ten times that value for society - maybe its factory is polluting the air of a town causing the locals to pay tens of millions of dollars of medical bills as a result - then it has a negative Humankind Value, and arguably has no place in an ethical portfolio. On the other hand, while there’s no such thing as a perfect company, if a company has a small shortfall when it comes to how it treats its employees, but on the whole is producing much more positive value for customers, investors and society, then the company’s Humankind Value will take a hit because of how it is treating its employees, but it can still be included in an impact portfolio because on the whole, it is doing good things for humanity. Let’s work through some concrete examples now to better understand how this works.

Let’s go through a simple negative example to start – Phillip Morris International. Phillip Morris is primarily a tobacco company. It is very profitable for its investors, and treats its employees reasonably well on the whole. However when it comes to how it treats its customers, there is a large segment of the population that purchases and uses cigarettes without fully understanding the consequences of doing so. Many people die as a result. When it comes to how the company treats society, there are many people, who are not customers of the company, that end up inhaling toxic second-hand smoke, and die as a result. By placing a dollar value on a human life lost, we can make these deaths comparable to the positive economic value that Phillip Morris is creating. The value here for customers and society is so negative according to Humankind Value researchers, that it outweighs the good – the profits and the jobs that Phillip Morris provides. It therefore cannot be included in an ethical investment portfolio. Check out this infographic breaking down the negative (shown in gray) and the positive (shown in green) value that Phillip Morris is providing to humanity:

Let’s work through a more complicated example now: Google. Google is primarily an advertising company that gets paid by businesses to show their ads on its websites and applications. Google is profitable for its investors, so that is a mark in its favor. Its customers, businesses that advertise their services, are ultimately getting value from google, so that is another mark in its favor. Google treats its employees quite well, another mark in its favor. However when it comes to Google’s impact on society at large, the picture gets more complicated. Google’s business relies heavily on using data from the people who use its sites to improve its advertising service. From people searching on the internet on Google.com, using Gmail to communicate, Google Maps to travel, YouTube to be entertained, etc. many people are giving up their online behavioral data to Google, and crucially, don’t fully understand its value. Google therefore gets a demerit for harvesting some people’s data. On the other hand, Google is providing all of these services - internet search, email, maps, and streaming video, to the public for free. When was the last time you paid to conduct an internet search, or to use Gmail, or Google Maps? So society is reaping a tremendous benefit here at the same time. This is where quantification comes into play. What is the size of the demerit that Google should receive for using people’s data without their full awareness, and how does it compare to the size of all the positive marks they are getting for the value they are providing to their investors, customers, employees, as well as the free services they are providing society? According to Humankind Value researchers, these positive impacts, in particular the positive benefit for society, far outweighs the negative impact on society here. And while Google could improve on its Humankind Value if it addressed its data harvesting issues, it can be safely included in an impact portfolio because of the overwhelmingly positive value that it provides overall. Check out this infographic breaking down the negative (shown in gray) and the positive (shown in green) value that Google is providing to humanity:

As you may have already guessed, this quantitative focus on ethical human impact tends to favor companies that are providing valuable free services, or alternatively, by helping to save lives, by for example, providing food access, water access, or healthcare access. Similarly, an ethical human impact focus will penalize companies that are hurting people, especially if they are causing serious injury or death. Companies that sell toxic products or contribute to air pollution are at a major disadvantage here. This is all for the good because, going back to our example with Allie and Beth, ethical investors ultimately want to encourage companies to stop hurting people – and instead do more good.

How to Compare Different Ethical Issues

One of the roadblocks to applying the Golden Rule to an ethical investment portfolio is that people sometimes disagree about the relative importance of different ethical issues. But a quantitative approach can help to resolve these differences. Below is a chart of just some of the major issues globally that result in large numbers of people’s deaths per year. Notice how by looking at human impact, starting with annual deaths associated with each issue, we are able to get a sense of the relative size of the ethical impact that different issues have. For example, we can see that ambient air pollution results in more than three times more annual deaths globally than does second-hand tobacco smoke, and that second-hand tobacco smoke in turn causes about twenty three times more annual global deaths than do all global military conflicts.

smoking & breastfeeding chart

It is hard to argue with these raw figures. If you could solve only one of the above issues, which one would you solve?

This works just as well with positive impacts. See how many lives are saved on an annual basis around the world due to the below sample of issues.

CAW Pharma

Clearly, companies that are contributing to healthcare, food and water access are providing tremendous value to humanity in the form of lives saved. Providing people with access to food and life-saving pharmaceuticals are among the most positively impactful things that companies can do.

A quantitative approach to measuring human suffering and human benefit allows us to make important observations like these, which help us focus on creating investment portfolios that reflect the differences in human impact that these different issues have. Companies doing more of these good things should be favored; companies doing more of the bad should be shunned. Ultimately, by quantifying companies’ human impact and investing on that basis, ethical investors can work to improve the world by contributing less to human suffering and death, while contributing more to human thriving and life.

Creating Your Own Ethical Investment Portfolio

You can certainly spend the time doing this research and investing on your own. But this might seem like a daunting challenge. At a minimum it can be quite time consuming. If you’d like some help putting together an ethical investment portfolio and want to join a community of like-minded investors working toward the same goal, you can partner with us at Humankind Investments to make it happen. We do this quantitative ethical research into human impact and we also work to reach out to companies on your behalf to try to encourage them to improve on the value that they provide humanity. We do this like it’s our job (because it is!). As an investment firm focused on ethical investing, that’s all we do all day.

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