Some companies set their sights on making profits, but forget about how the way they’re making money can ultimately affect society or the environment. You don’t want this to happen to you as an investor either.
While it may be exciting to see the share price of your stock take a notable leap and keep track of stock trades online, it is also important to consider just how a company is making its money. Is it following socially responsible guidelines? Is how it makes money making a positive impact overall?
Learning How to Invest Ethically
When you make money on the stock exchange, you’ll experience better overall returns if you learn how to invest ethically. Not only will you feel better about investing, but you’ll also know your investments are making a difference in how people live and work.
What Is the Kindness Quotient (KQ) of the Company?
That means choosing companies that consider the human condition and make priorities in helping people live better lives while using their resources to make a difference. Therefore, when you invest ethically, you have to consider the “kindness quotient” of a company. A company’s KQ involves how the company treats others.
Does the business provide products and services that will benefit others – that reflect “kindness” in how they’re made and offered? For example, a cigarette company offers a product that may be enticing to some people. However, is it a product that is good for their health? Will it produce a positive result? Will it make their life better?
Or, is it a product that profits a company, but at the expense of someone else’s welfare? That is what ethical investing is all about. You need to answer the above questions. While some companies are focused on making money, others are also focused on how they’re making money.
What You Need to Ask When Making Investment Decisions
Therefore, the first question you have to ask yourself when investing ethically is, “How does this company make money?” Next, you need to ask the following:
- Where does the company source its materials?
- Does it use environmentally friendly materials or practice operations that reduce energy waste and lessen the production of carbon?
- Does the manufacture of the product cause problems with pollution or increase environmental concerns?
- What is the company’s supply chain? Is it set up to reduce fuel use and pollution?
- Why do people buy the products or services? Will it benefit them?
- How is the company giving back to the community?
- What types of charitable causes does the company support?
The above questions will give you a better insight into a company’s operations and how it wants to spend its money to make money and increase its dividend share.
What Is the Company’s ESG Score?
When seeking answers along these lines, it’s also helpful to factor in a company’s ESG score. ESG is short for the words “environmental”, “social,” and “governance.” As an investor, you need to review these factors when analyzing a company’s protocol for making money and planning for growth.
This is where the “golden rule” – the true measure of financial ethics and ethical investing begins.
Factoring in the Environment
How a company operates should be done in such a way that completely considers the environment, society, and the way things are governed and managed. For example, when factoring in the environment in your investing plan, you need to know how a company is addressing the following environmental subjects:
- Water use
- Biodiversity
- Pollutants in the air and water
- Deforestation
- Waste management and recycling
Reviewing Social Responsibility
With respect to addressing the social aspect of a company’s operations, you, as an investor, need to review how a business handles:
- Data security and customer privacy
- Customer service
- Employee input
- Community relationships
- Workforce standards
- Human rights
Accounting for Governance
Governance should include factors such as:
- Who governs a company’s board of directors
- Executive salaries
- Contributions made to political organizations or candidates
- Incidents, such as corruption or bribery
All these areas should be examined in full before you invest in a stock, as they do have an impact on your investing and financial goals.
Why You Need to Know the ESG Score
Companies with higher ESG scores (70 or more) fare better in the stock market with respect to valuation and growth. So, it’s critically important that you learn more about the benefits of ethical investing. Doing so will help you reap better returns financially and personally.
Making a Difference through Your Stock Investments
Today, stock investing extends past the idea of getting a good return. It also means that what you receive for your investment should positively impact someone else’s life as well. That is why it is crucial that you look at the stocks of companies that focus on making a difference environmentally and socially.
Most stock investors use ESG calculations to choose stocks they feel are ethically superior, as doing so can guide them to find out more about how their money is spent.
According to researchers who factor the ESG metric into stock investment plans, most investors look at a company’s governance, or how it makes its decisions with respect to social responsibility, its employees and customers, and the environment.
The Primary Drivers of ESG Scoring
The primary drivers influencing the calculation of a company’s ESG score are customer demand and risk management. Indeed, a company that wants to reduce the risk of liability and gain the public’s trust will use its ESG rating to show proof of its earning potential and reliability.
The ESG score of a company gives you a stronger idea of how to ethically measure a business when investing in stocks. Stocks that have ESG ratings of 70 or more, will narrow down your investment choices, as they follow sustainable and socially responsible practices.
Don’t bother with any stock that has an ESG of 50 or under, as the company clearly does not make operational decisions that positively impact human welfare or the environment.
Some companies receive ESG ratings in triple letters. In this case, a business with a rating of AAA is an example of a corporation that meets all the requirements set for environmental, social responsibility, and governance for a company. A rating of CCC is a bad score for a company with respect to ethics and sustainability.
How is a Company Spending Its Money to Make Money?
When investing ethically in stocks then, you need to become familiar with a company’s ESG rating as well as how it spends its money to make money. The more you know about these indicators, the easier it will be for you to choose the best ethical stocks for your portfolio.
