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Can You Be an Ethical Investor?

Socially responsible indexes can help you invest in companies that reflect your values, but they have their flaws.

If you invest in an index fund or have a company-backed 401(k), chances are you own stock in a gun company too. That's because many of the biggest funds invest directly in gun stocks like American Outdoor Brands (which owns the Smith & Wesson brand), Ruger, and Vista Outdoor.

The shooting at Marjory Stoneman Douglas High School served as a wake up call to many that we must do more to end gun violence in the US, so you might be interested in selling any gun industry stocks. But that's hard to do when you don't even know which stocks you are invested in, which is often the case if you've put your money in mutual funds that hold stock in literally hundreds of companies.


If you buy individual stocks, it's relatively easy to figure out if the companies you invest in support your values. Do your own research into corporate behavior, and invest in the companies that pass your test.

But if you’d like to spend at least some of your time doing literally anything else, that means your investments will be managed by other investors. Many funds have the lone primary imperative to “make the most money,” but there are plenty that are pickier with their investment choices. These are known as socially responsible investing (SRI) funds, and they are where you’re going to want to look.

Socially responsible investments include a wide range of initiatives that include everything from increasing the use of alternative energy to promoting equal pay. Funds that fall into this category have more than $6 billion USD in investments, Moneyreported. Some examples include iShares MSCA SA ESG Select and SPDR SSGA Gender Diversity Index ETF. Here's a list of socially responsibly mutual funds developed by the Forum for Sustainable and Responsible Investment, which shows what funds restrict investments to companies that negatively impact the environment or manufacture weapons, or invest only in places that focus on diversity or positive labor relations.

Know What You Are Actually Investing In

The problem with "ethical investing" is that things get muddy on closer inspection.

“I was looking at a SRI mutual fund, and they said they were interested in finding good employers, that is, people that treat their employees well,” says Jared Peifer, a professor specializing in corporate responsibility at the Zicklin School of Business. “But when I looked at top ten holdings, there was Wells Fargo, which we don’t think of as a great employer over the past couple of years.” (You may recall that the bank opened millions of fake accounts for customers and got fined for doing so. Some former employees claim that such unethical behavior was actually rewarded.)


This is the main crack when it comes to any kind of “ethical investment.” Ethics are personal principles that don’t necessarily translate easily to others, even to someone else who seems like they share your own. (Two people who agree on the importance of “positive labor relations” may have extremely different views of what that means.)

Even within yourself, you develop tiers of importance: Is it better to invest in a corporation that’s trying to bring about positive change in diversity, or to notinvest in a corporation that’s harming the environment or a business that makes gun parts? These are all personal questions that take a bit of soul searching.

You Can Make Money as an Ethical Investor

The good news is that it doesn’t seem like investing ethically will make you less money. That was the finding of a 2017 study published in Journal of Business Ethics: “Our results show that socially responsible investments have no asset pricing impact on the US market. We argue that this ‘no financial impact’ finding indicates that investors will not be disadvantaged financially by investing in socially responsible funds or corporations,” the study’s authors said.

Now, does any of this ethical investing actually do anything? “It definitely makes people sleep better at night, or bump their chest out a little and feel more moral than their brother-in-law,” says Peifer. “But it can make a difference if enough people come forward and denounce these corporations.” Peifer points to the success of the financial divestment campaign used from the 1960s through the 80s to pressure the South African government to dismantle their apartheid laws. (Admittedly, in concert with many other campaigns going on at the same time, but still.)

But that was a generation ago, and subsequent ethical investments haven’t slowed down climate change, further empowered workers, or made the least possible impact on weapons manufacturing. It’s likely too cynical to say that they’ve done nothing, but it’s hard to point to tangible, societal changes. Then again, Peifer says, “it’s hard to know how many conversations behind closed doors happen with management” because of such investments.

Which is all to say: Should you invest ethically? Can’t hurt.

Follow Rick Paulus on Twitter.

This article originally appeared on FREE.