Ethical and responsible investment funds: How do they work?

The growing interest in sustainability has led many investors to seek ways to align their values with their financial decisions. This is where options like ethical and responsible investment funds become interesting for investors, especially as they meet important ethical criteria.

Ethical and responsible investment funds offer the possibility to invest in companies that meet certain environmental, social, and governance (ESG) criteria without sacrificing profitability. Therefore, to help you fully understand this type of investment and its benefits, we have prepared this comprehensive guide.

What are ethical and responsible investment funds?

Ethical and responsible investment funds are financial vehicles that invest in companies that meet specific ethical criteria. These are usually related to environmental sustainability, human rights, gender equality, and responsible corporate governance.

Unlike traditional funds, these funds not only seek profitability but also aim to contribute to a positive impact on society and the environment. Therefore, it is an ideal option for investors who are looking for both profitability and funds that contribute positively.

Differences from traditional funds

The main difference lies in the asset selection criteria. While traditional funds are firmly focused on maximizing profits without considering the social or environmental implications of the companies they invest in, ethical funds select companies that adhere to ESG principles.

This approach seeks to balance financial profitability with a positive impact on the social and environmental landscape. But how can companies be evaluated to form an ethical fund?

Selection criteria in ethical and responsible funds

The selection of companies within these funds is based on a series of criteria that reflect the ethical and responsible values of the fund. These are divided as follows:

Environmental, social, and governance (ESG) criteria

ESG criteria are the standard by which ethical funds operate. These three aspects are key for ethical funds and are divided into three distinct areas:

• Environmental – Refers to companies’ sustainable practices regarding the use of natural resources, reduction of carbon emissions, and climate change policies.
• Social – Evaluates the commitment to human rights, employee welfare, gender equality, and non-discrimination.
• Governance – Focuses on transparency and responsible management practices, considering aspects like business ethics and the independence of governing bodies.

Exclusions and prohibited sectors

Many ethical funds implement exclusion policies, meaning that they avoid investing in certain sectors that are considered harmful or immoral, such as the arms industry, tobacco, fossil fuels, or gambling.

This exclusion ensures that the capital invested in the fund does not finance activities that go against the ethical values of the fund.

Benefits and challenges of ethical investment funds

• Positive impact and profitability – One of the main advantages of ethical funds is that they allow investors to generate a positive impact on the world by investing in companies that promote responsible practices. In the long term, this approach not only helps build a more sustainable future but can also offer profitability. In fact, some research has shown that companies with high ESG standards tend to be more resilient and offer better long-term returns.
• Challenges and associated risks – The challenges of these funds cannot be overlooked. By limiting investments to certain sectors or companies that meet ethical criteria, investment options are reduced, which could limit profitability opportunities in some cases. Moreover, not all companies labeled as “sustainable” truly meet responsibility criteria, a phenomenon known as greenwashing, where companies appear to be greener and more sustainable than they really are.

How to choose a responsible investment fund?

Choosing an ethical fund may be a different process than selecting a traditional fund. Why is this? Because it involves evaluating both performance and the ethical principles that align with the investor’s values.

When choosing an ethical investment fund, it is important to consider several aspects:

• ESG criteria – It is important to verify that the fund you want to invest in complies with ESG standards and that its investments align with the investor’s principles.
• Profitability history – Make sure the fund you want to invest in has demonstrated consistent performance over time.
• Costs and fees – Many ethical funds are accessible, while others may have higher fees due to the additional research required to select responsible companies.

It is also important to highlight that a good ethical fund should offer transparency in investment decisions. Before investing, review each of the fund’s reports, ensuring that they meet the promised ethical criteria. Also, make sure that historical returns are comparable to other funds in the same category to ensure that profitability is not being sacrificed for ethics.

Is it worth investing in ethical and responsible funds?

This is an excellent option for those looking to align their investments with personal values without sacrificing long-term profitability. These funds allow for a positive impact on the world, fostering the development of sustainable, socially responsible companies with good corporate governance practices.

While there are challenges, such as the risk of reduced diversification or the possibility of greenwashing, the benefits of contributing to positive change alongside the potential for good returns make it an attractive option for conscious investors.

If you are considering diversifying your investments ethically, at Inversa, we offer interesting alternatives through crowdlending. With our platform, you can invest in sustainable and ethical projects while earning competitive returns. And all of this with the support of our advisors to answer any of your questions.