ETHICS IN INVESTING: DOES IT MATTER?

Ethics refers to moral principles that control or influence a person’s behaviors. In abstract terms, ethics are described as the fragrance of wisdom. In practical terms, ethics are moral rules people apply in making decisions. Individual ethics are determined by family and peer influences, experiences, personal values and morals, and situational factors. Though ethics is a personal issue and is determined by a host of factors, we expect an individual’s ethical behavior to confirm generally accepted social norms.

Ethical investment or socially responsible investment is broadly defined as “The integration of personal values, social considerations, and economic factors influencing the investment decisions.

Financial returns remain an important outcome but it is not the sole criterion driving investments; ethical concerns are also included (Michelson, G, et al).

It is said, “There is nothing wrong with making money but it’s how you make the money that counts” (Murray, L.).

There are two major ways of establishing whether an investment is ethical. The first is to apply a negative screen (a ‘never if’ case) whereby certain businesses are avoided because they are injurious to human health. For example, investment in firms producing or dealing in alcohol, tobacco, and gambling is avoided. The second way is to apply a positive screen (an ‘only if’ case) to those firms that remain possible investment targets; in particular, those identified as engaging in socially responsible practices are seen as more attractive investment options.

What should we do to restrain from unethical practices and promote ethical behavior in investment? We may suggest a long list of prescriptions such as appropriate legal and institutional setups, enforcement of the rule of law and adherence to the principles of good governance, etc. all these are useful, but most importantly, our firm commitment to our ethical values – uprightness and compassion are fundamental. Once these values guide our investment decisions, we may restrain from unethical practices and promote ethical ones.