Ethical investing means choosing investments that match your values. In practice, this usually means avoiding certain industries (like fossil fuels, tobacco, or weapons) or favouring companies that score well on environmental and social criteria. The challenge is that "ethical" means different things to different people, which is why there are so many labels.
What is ethical investing?
At its simplest, ethical investing is filtering your investments based on what you believe in. Some people just want to avoid the worst offenders. Others want every penny going toward companies that actively do good. The labels below help you work out where you fall on that spectrum.
What does ESG mean?
ESG is the most common label you'll see. It scores companies on three areas:
- Environmental: Carbon emissions, waste management, renewable energy use
- Social: Labour practices, diversity, community impact, data privacy
- Governance: Board diversity, executive pay, accounting transparency, shareholder rights
ESG funds typically don't exclude entire industries. Instead, they overweight companies with better ESG scores and underweight those with worse scores. This means an ESG fund might still hold oil companies if those companies score well on governance or social factors.
If you want to avoid specific industries entirely, ESG alone might not be strict enough for you.
What does SRI mean?
SRI funds go further than ESG. They actively exclude companies or industries that don't meet specific ethical criteria. Common exclusions include:
- Fossil fuels (oil, gas, coal)
- Tobacco and alcohol
- Weapons and defence
- Gambling
- Adult entertainment
SRI is closer to what most people picture when they think "ethical investing." You're drawing clear lines about what you will and won't invest in.
What do "sustainable," "impact," and "green" mean?
Sustainable: Usually similar to ESG, but can be vague. Check the fund's documentation to see what it actually does.
Impact: Funds designed to achieve specific positive outcomes, like clean energy or affordable housing. These tend to be more focused and niche.
Climate/Green: Focused specifically on environmental factors, often targeting low-carbon companies or clean energy.
What is greenwashing and how do I spot it?
Greenwashing is when a fund markets itself as ethical or sustainable but doesn't meaningfully differ from a standard fund. This is more common than you'd hope.
Some red flags:
- The fund's top holdings look identical to a standard index fund
- Vague language like "sustainability-focused" without clear exclusion criteria
- Very high fees for what amounts to minor tweaks
The best defence is to check what the fund actually holds. Most fund providers publish their full holdings list. If a "sustainable" fund's biggest holding is an oil company, that tells you something.
Do ethical funds perform worse?
This is the question everyone asks. The short answer: not necessarily.
Over the past decade, many ESG and sustainable funds have performed similarly to or even slightly better than their non-ethical counterparts. This isn't guaranteed to continue, but the idea that ethical investing requires sacrificing returns is largely outdated.
That said, ethical funds do tend to have slightly higher fees than standard index funds, because they require more active management and screening. The difference is usually small (0.1-0.2% per year), but it's worth being aware of.
How do I choose the right level of ethical screening?
This is a personal decision. Here's a rough spectrum:
- No preference: Standard index funds. Lowest fees, broadest diversification
- Mild preference: ESG-screened funds. Some ethical filtering, still broadly diversified
- Strong preference: SRI funds. Clear exclusions of industries you object to
- Very strict: Impact or thematic funds. Focused on specific outcomes like clean energy
There's no wrong answer. The key is understanding what each label actually does so you can choose the level that matches your values.
The bottom line
Ethical investing lets you avoid industries you object to or favour companies with better environmental and social practices. ESG is the lightest filter, SRI draws harder lines, and impact funds target specific outcomes. Check what a fund actually holds before trusting the label.