No easy answers: the problem with socially conscious trading

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Updated: 04 March 2020

Many traders believe that socially conscious trading is the way forward — a way to profit from trading while also making the world a better place. We have the power, as investors (and, of course, as consumers) to put our money where our principles are, and support the companies making the kind of impact on the world that we want to see. It’s a power we should probably all be using, but it’s also more complex than it seems. There are truly no easy answers when it comes to ethical trading.

It’s easy to assume that ethical trading is as simple as picking the most ethical companies out there and investing in them, but of course, it’s not. It is incredibly hard to define what corporate social responsibility means, and given our different values, beliefs and priorities, it’s fair to say it means something a little different to each one of us. Some of us want to invest in clean, green energy, some of us want to invest in Fair Trade coffee and other commodities, and some of us want to invest in organisations that set up their own charities and foundations to have a real impact on the disadvantaged, all over the world.

Defining socially responsible organisations

The problem is, it is often impossible to draw hard lines and determine if a corporation is socially responsible or not. While there is indeed an ISO standard, laying out over 400 recommendations for organisations dedicated to improving CSR, this is a voluntary standard aimed at making it easier for companies to self-regulate. There are no external regulators in this area and no official ‘stamp of approval’ that marks a company as socially responsible. The Forum for Sustainable and Responsible Investment has even stated that “there is no single term to describe” exactly what socially responsible investing is. This means that it is up to us as investors and consumers to decide what we consider an acceptable demonstration of social responsibility.

There are many companies that meet or exceed some criteria that would indicate their social responsibility while simultaneously failing other criteria. Perhaps the best example is one of the best-known companies in the world. McDonalds is known for both its Ronald McDonald House Charities, supporting children and families in need across the globe, and also for its poverty-level wages and unhealthy food (marketed predominantly to children). For every investor who feels that supporting McDonalds and its high-profile charity is justifiable, there are doubtless several others who refuse to invest in the company based on concerns about public health, workers’ rights and animal welfare.

McDonalds is not alone in prioritising some social issues while excluding others. Pepsi is known for the Pepsi Refresh Project, using social media tools to help raise support for numerous social and environmental causes worldwide, but also for selling one of the unhealthiest drinks on the planet. Many companies support worthwhile charities and causes, while their core business activities continue to damage the environment, public health or employee well-being. A charity, programme, or foundation set up by a corporation has always been a fairly good use of PR dollars. That is ever more the case in a world where the majority of consumers agree that they have a tendency to spend their money with organisations who actively support a cause they care about.

In fact, the very rise in the popularity of ethical investing, and ethical consumerism has led many companies to set up a high-profile, PR-backed charity project. This is often while continuing with their basic model of paying minimum wages, mistreating workers, and damaging the environment. For these reasons, ethical trading is complicated from the very start.

The political undertones in ethical investing

It has long been the case that certain ‘ethical’ practices are inherently seen as anti-government, which in itself should probably give us pause for thought about the nature of our governments. The debate, for example, that pitches those in favour of action against climate change against the growth of the economy and the interests of the government, can be particularly harmful. It can even lead to financial advisors being reluctant to advise clients on socially responsible investing, even though many investors are increasingly interested in it.

Of course, investing in companies supporting action against climate change is not in itself anti-government. Nor is it detrimental to the economy. In fact, many would argue that those investing in clean, green energy at this point in our history will win just as big as those who struck oil in the early days of fossil fuel usage.

There is, however, definitely a political undertone when it comes to ethical trading, that tends to muddy the waters, and of course, this depends on the country you live in and the government you currently reside under. If your leaders are prioritising oil drilling, laying new pipelines, and fracking, investing in clean energy can seem positively controversial. If your leaders are already concentrating on bringing the whole country hydro-electric power, and exporting what oil they produce so as not to pollute their own atmosphere (as is the current case in Norway, for example) there’s nothing controversial about ethical investing.

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With so much debate around what constitutes social responsibility, combined with the complications of the balance between ethics, the economy and global governments, one thing is for sure. If you are interested in socially responsible investing, you have to answer a very important, and very personal question.

What does social responsibility mean to you?

The first thing to do, as a potential ethical trader, is to assess your own values. You need to prioritise what is important to you, and know which business activities and social issues you want to support. If your priorities are environmental protection and animal welfare, find the companies that prioritise those issues. Want to support fair wages and workers’ rights in your own country? Invest in companies that have excellent records in those areas.

You’ll also want to decide what matters most, out of all the issues you support. If you want to support initiatives to help children across the globe, but you also disagree with marketing ‘obesity in a box’ to children in your home country, certain fast food outlets will be a hard no, for you. Some people will be against investing in big pharma, with the many questionable practices that go on in that industry. Others will see that as investing in saving lives. It really is about personal perspective and your own beliefs regarding what makes the world a better place.

How do you find the companies that align with your own morals?

Generally, finding the right companies to invest in is about doing your research, and keeping on top of what is going on in the news regarding CSR. The headlines may say a certain company is setting up a charity. Still, you may want to dig a little deeper into their actual business practices before putting money into that company.

Many investors carry out basic ESG screening when looking at potential investments. This refers to environmental, social and governance criteria. You can screen companies yourself, examine their public records, and their own claims and targets in certain areas.

Environmental criteria generally include aspects like emissions and carbon footprint, use of green energy, recycling targets, recycled materials used, and obvious things like whether the company produces toxic waste (and how responsibly it processes waste in general). Many investors include animal welfare, pesticide use, resource management, and compliance with government environmental regulations in this category.

Social criteria include how a company treats its employees and customers, how much it contributes to its local communities and wider society, and which causes and charities it donates to. Other issues to examine here include whether the company’s supply chain and other partners show social responsibility and how the company treats its various stakeholders.

Governance can be checked by looking at things such as the transparency offered by senior leadership, executive pay, shareholder rights and audit results. Many investors feel it is vital that companies, and leaders within those companies, operate with integrity, avoid conflicts of interest in their choices of business activities, board members and internal appointments, and do not use political contributions to further their own interests.

While many investors like to check up personally on the companies they invest in, it is not always possible or practical. However, the financial industry has, as always, been quick to respond to customer demand in this area. Many brokerage firms and financial services companies now offer Exchange Traded Funds(ETFs) and other financial products that are pre-screened by them and follow ESG criteria. As stated by the US SIF Foundation, investors held over $11.6tn in assets. According to ESG criteria in 2018, this was around $3tn more than they did just two years earlier, and the number is steadily increasing.

If you need more inspiration as you build your socially responsible investment portfolio, take a look at our articles on sustainable ETFs, socially responsible companies, and ethical stocks, that form part of our Ultimate Guide to Ethical Trading.