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Ethical investing: from extra to main character

Blog
3 November 2022
Al invertir con ética se compatibiliza la rentabilidad económica con el beneficio social y medioambiental

There are few levers as powerful for transforming society as an investment. Financing a company means aligning oneself with its vision and taking responsibility for the consequences of its activity. And this impact is not always positive. For example, while some firms protect the environment and care about the people around them, others only pursue economic profit, leaving these aspects aside. For this reason, any individual who wishes to avoid being part of these bad practices must understand what ethical investing is.

Countless organizations struggle daily to take care of their environment and boost their communities. And many of them need funding to grow and expand in the marketplace. Without solid backing, most would disappear.

But traditional banking institutions have never shown any interest in giving them the boost they need because they put the economic aspect above the rest. There have always been great ideas to change the world, but they needed more opportunities.

This was a real brake on progress since it was more difficult to end injustice. Moreover, to prosper, many initiatives needed the approval of a bank. And banks defended their interests to the hilt, so they did not trust those that did not place profitability at the heart of their business model.

For this reason, the boom these projects are currently experiencing is not only due to an increase in the number of ideas but also to the fact that they finally have platforms that give them a voice and connect them with potential investors. In addition, new channels are continually being created to showcase their work. And, by not depending on a few banking institutions, they have a better chance of getting off the ground. After all, this diversity of players increases their chances of finding a saver who is committed to their cause.

Ethical investing also benefit savers, who enjoy a wider range of companies to place their money. And they are increasingly interested in engaging with ethical organizations. When deciding in which direction to invest their capital, they value aspects such as sustainability, equality and good governance. Of course, the economic variable remains fundamental, but it no longer occupies the leading role exclusively.

What is ethical investing?

Economic profit should be balanced with social and environmental benefits. The ethical investment was born in this spirit: a set of financial practices that combine both sides of the coin. Ethical investing is, in short, investing in companies that seek to make the world a better place.

This concept covers all kinds of firms: those that seek to promote culture, education, job placement, equal opportunities, fair trade, and renewable energies... But they all have one thing in common: they have values such as solidarity and sustainability in their DNA.

The promotion of these causes is not only done through the results of their activity. In other words, it is not necessary to be a recycling company to incorporate measures aimed at recycling waste during the production and distribution processes. Absolutely all entities can adhere to these practices.

To be considered ethical, an organization must also exercise governance based on transparency, protecting the rights of its employees. And it must strive to reduce its environmental impact as much as possible, reducing its carbon footprint and helping to care for the planet.

However, even if they are not pursuing revenue at all costs, these businesses are looking to be profitable. After all, if they do not make a profit, they will be unable to ensure their survival. And this would prevent them from continuing to fight for the causes they fiercely defend. For this reason, they develop viable and solvent business plans.

A shift in investor priorities

As more and more initiatives are giving greater prominence to social and environmental factors, these variables have also gradually climbed up the list of savers' priorities.

In the past, their main objective was to multiply their capital. And to ensure their success, they chose the companies that promised the best returns, regardless of whether they were tainted by corruption, exploited their workers or polluted their environment. All these aspects were unimportant; the main thing was to make money.

But by supporting firms that commit these acts, one indirectly participates in the damage they cause. Over the years, investors became aware of this situation and realized their power to make a difference. Their money could make the world better or worse.

Today, many investors are no longer simply looking for income but also considering the company's contribution to society and the environment. And they make investment decisions based on the combination of these three areas, marginalizing entities with reprehensible behavior.

The proliferation of ethical investment also conceals benefits for them, as they have more opportunities to diversify their investments. Previously, their options were limited to stock market operations, and there were few alternatives to buying and selling shares. But the emergence of ethical initiatives has opened the door to a new era in investing, where they can spread their assets more wisely.

The value of ethical investing

Finance is an extremely effective tool for realizing the desired society. If one aspires to live in a more sustainable and egalitarian world, investing in businesses that share this spirit is essential. On the contrary, supporting corrupt or polluting organizations implies validating a model of society in which such acts are condoned and tolerated.

To invest ethically, it is necessary to flee from these mentalities, which represent the greediest side of human beings. This model does not understand money as an end but as a means to improve society. And it considers social and environmental gain as necessary as economic gain.

This entails an ethical use of money, which is put at the service of the planet to make a positive impact. And the investor can witness firsthand how his investment causes such an impact, which generates colossal satisfaction, and denotes the transparency that characterizes this system.

This type of project is not as speculative. For this reason, throughout history, they have not received the same resources as the rest. Consequently, investing ethically means trying to balance the scales. And it provides them with a platform for investors to come to, the first step for them to spread their wings.

A society demanding more accountability

The number of people advocating such discourse today would have been unimaginable a century ago. Back then, all corporate malpractice was ignored or forgiven as long as it offered returns to investors. The perpetuation of this impunity was the responsibility of both parties: companies committed harmful acts, and shareholders continued to support them financially.

Very few people spoke out against this situation. However, over the years, they were no longer in the minority. Gradually, citizens became aware of how damaging an investment of capital in irresponsible firms could be. Protests intensified. Organizations began to be held accountable for their actions, demanding that they limit their harmful activities. Thus, the state of opinion in society was changing.

But it was not only bad business practices that were brought to light, and they began to be in the spotlight. The focus was also on the positive. Campaigns were launched to highlight and promote socially responsible initiatives. And individuals interested in promoting just causes were inclined to support them, investing part of their capital so that they could continue to do their work.

This was the germ of what is known today as ethical investing.

The danger of empty rhetoric

Companies quickly saw the enormous power of incorporating ethics into their processes to attract customers. And some entrepreneurs saw the opportunity to get rich by using corporate responsibility. Overnight, most projects claimed to be ethical. But, in many cases, this was for publicity reasons. Ethics sold.

So the bubble began to inflate. Firms polished their speeches but did not accompany them with real actions. It was a facade imposed by managers to captivate the growing segment of consumers concerned about equality and sustainability. Only a small percentage of the organizations that boasted corporate responsibility made a genuine commitment.

This created a difficulty, as it was no easy task to distinguish truly responsible businesses from those that simply promoted their supposed ethics to increase sales.

How to identify ethical companies?

While there is no universal guide, several clues help differentiate those entities with an honest commitment from those that use ethics as a marketing ploy.

To begin with, it is essential to rule out all companies with negative activities. Those that manufacture products or offer harmful services to people or society. Examples are businesses dedicated to gambling or selling weapons, alcohol and tobacco. The result of their activity is harmful to health and can create addictions, so an investment in such firms would be considered unethical.

International treaties are also very useful. These agreements, signed by most of the world's countries, define a series of basic rights and duties that apply to all humans. Consequently, these covenants must be respected by all organizations. If they violate any of their articles, savers who aspire to invest their capital ethically should avoid them.

The Universal Declaration of Human Rights, the Declaration of the International Labor Organization or the United Nations Convention against Corruption are some of the treaties that should be considered.

But there are other ways to find the companies with the best practices. One of them is the selection of the companies with the best valuation within each sector, popularly known as the best-in-class system. In addition, independent firms are dedicated to auditing the rest of the organizations. To carry out this task, they study aspects such as their impact on society and the environment.

Later, they give them a rating based on their practices and publish a final list in which all the companies are listed in order. The higher their score, the more ethical they are. This information is used by investors, who have the guarantee that the company they are going to trust is responsible.

Finally, it is crucial to pay attention to ESG criteria, as they offer a very accurate perspective on the degree of responsibility of a given organization.

The environmental factors concern the consequences of its activity on the environment and the actions it takes to protect the environment. Social factors refer to managing human capital and its impact on society. Finally, there are the governance factors, which consider the structure and how power is exercised within the company.

A company that pursues energy efficiency and promotes the use of resources has work-life balance measures and training programs for employees, complies with legal regulations and is committed to transparency will stand out in all three areas.

Cada vez son más los ahorradores y organizaciones que apuestan por invertir con ética

Thematic investment and impact investment

Investors interested in supporting a specific sector can opt for thematic investment, one of the clearest examples of ethical investing. In this modality, individuals finance those issues they care about or are most committed to, which denotes a very high degree of knowledge and involvement.

The Sustainable Development Goals established by the UN play a crucial role in this scenario. The seventeen SDGs are accepted by an infinite number of entities, which use them to indicate graphically and simply those causes for which they fight, such as the end of poverty, gender equality or the creation of sustainable cities and communities. This information guides potential investors, showing them the projects aligned with their interests.

On the other hand, there is impact investing. This method consists of financing certain initiatives directly. It occurs when the saver is convinced of a company's potential and decides to support it financially so that it can prosper and establish itself in the market.

One of its main attractions is the possibility of closely monitoring progress. This produces great satisfaction in investors, who see how their money generates a positive change in society.

However, combining these six strategies is the most useful way to find businesses with a genuine commitment. In this way, you will identify all those companies that strive to impact their communities, improving citizens' quality of life.

Ethical data investment

Ethical investing is moving from being a simple alternative to becoming a standard. With each passing day, more and more individuals and organizations are turning to these channels. Some are replacing traditional forms of investment with this modality, while others are using it as a complement.

Large banks have joined this phenomenon and are developing their financial products based on SRI (or Socially Responsible Investment). Although they rejected this form of investment in the past, they are now embracing it, aware of the number of consumers who demand these services. As a result, they can no longer afford to ignore it, as they would be turning their backs on many customers.

The figures are tangible proof of how society is embracing this phenomenon. In 2020, more than €1.72 billion went to funding sustainable projects. This represented a number of ethical banking users close to 190,000. According to the Ethical Finance Barometer, a report that analyzes different SRI parameters annually, most are interested in environmental or social initiatives.

Some of them are concerned about the inability of companies to repay the loan later on. But this prejudice does not correspond to reality. Just because a firm is not pursuing unbridled economic growth does not mean it is not profitable. On the contrary, the default rate of ethical companies is 1.5%, three points lower than that of conventional companies, which rises to 4.5%.

Impact investment, meanwhile, has also managed to carve out a significant niche in the market. SpainNAB publishes an annual study analyzing its evolution at a national level. In 2021, impact investment experienced a 12% growth. And forecasts for the future are equally optimistic.

The adaptation of conventional entities

Ethical investment is an extremely broad concept in which very different alternatives find refuge. However, as long as an organization does no harm and is socially and environmentally responsible, any investment in it can be considered an ethical investment.

Traditional banking institutions have adapted to this new scenario. This has given rise, for example, to ethical banking. Unlike conventional banking, however, it does not seek to maximize profits but to care for the environment and society. Therefore, it offers sustainable financial products and reinvests its profits in initiatives that have a positive impact. In the same way, ethical insurers have also been created.

Socially responsible investment funds are another popular option. They work the same way as conventional investment funds, the only difference being that they incorporate ethical criteria and finance projects that aim to transform society.

In the classic stock market investment, it is also possible to invest ethically by buying shares in companies that generate positive consequences. However, this modality requires a deeper knowledge of the system on the part of individuals, who must thoroughly investigate the companies they are interested in to verify that they do not incur bad practices.

To help them in this task, various indexes have been created to study the sustainability of companies listed on the world's major stock exchanges, such as the Dow Jones Sustainability Index and the MSCI KLD 400 Social Index. Both were founded in the 1990s, an unmistakable sign of sustainability gaining colossal weight on the stock market scene.

Alternative mechanisms for ethical investing

While falling within the definition of ethical investing, the above options inherit their structure from the conventional financial system. However, other more innovative alternatives have also been created, specifically formulated to respond to the widespread demand for new financing channels.

First of all, there are microcredits, which were a real revolution. These short-term loans allowed low-income citizens to start up a business. Through it, they could profit, improve their quality of life and boost their communities.

This mechanism was created to fight poverty, especially in developing countries. Many of their inhabitants did not have access to banks, which perpetuated their poor economic situation. Moreover, since the amounts lent were not very high, they were accessible to all who wished to contribute.

Crowdfunding is another very popular alternative financing method for ethical investment, especially for small projects that need help to leap into the market. In this case, the investor is not looking for a profit. Their funding resembles a disinterested donation, as they do not receive a return on their money. However, both parties may agree to give you some kind of reward in exchange for your help. If the amount you contribute is very ambitious, the reward may be higher.

This mechanism is widely used for cultural initiatives. To make them known among savers, multiple online platforms have been developed, where it is already possible to make donations to support them.

If the investor does wish to enjoy a certain profitability, it is possible to bet on crowdfunding equity, a variation of this model. In this case, investors are rewarded with a small percentage of the company. If the company is successful, they will receive part of the profits. But the risk is high because they will not get their money back if it fails.

Crowdlending and crowdfactoring

But there are still more alternatives to invest ethically, created to suit the specific needs of each project and each investor. And some not only want to recover their loan but also want to obtain an economic benefit with a certain guarantee of security. This is where crowdlending and crowdfactoring come into play.

Crowdlending works in a similar way to traditional bank loans. Savers use their money to finance a business and, in return, receive a profit from the interest on the loan. Thanks to this mechanism, small businesses that did not have access to bank loans finally have access to resources. And individuals are free to select the organizations to which their capital will be allocated.

This system has a subcategory: crowdfactoring. Through this financing instrument, individuals contribute money to cover companies' invoices. As a reward for the advance, they get a small percentage. In this way, the companies collect the invoices in advance, which gives them access to resources. And, even though they may not receive the full amount of the invoice later, they have liquidity at crucial moments when it may be most needed.

There are different types of crowdfactoring, depending on who assumes the risk of non-payment if the debtor does not pay the invoice. In recourse factoring, the company is liable for the costs and will be obliged to repay the investor the amount it originally lent. In non-recourse factoring, the responsibility lies with the investor, who will not be able to reclaim that amount from the business.

In order not to scare away the investment, many crowdfactoring platforms use insurance companies to guarantee that the money will not be lost. This is one of the advantages of this solution, whose guarantees attract thousands of savers and projects.

This modality is already consolidating as one of the preferred options. And its growth is unstoppable. According to the Spanish Factoring Association, last year, it recorded an increase of 11.5% throughout the country.

Inversa, a platform for ethical investing

Inversa landed on the market in 2019 with a firm purpose: to connect savers and companies to boost the real economy. To this end, it has developed its crowdfactoring platform, which allows individuals who wish to earn a return on their capital to finance online the invoices of companies in need of liquid cash.

It is a solution built on three pillars: agility, flexibility and transparency. And it is highly attractive to savers, as they recover their investment in 30 to 180 days. But this is not the only advantage. They charge the interest on the operation in advance to encourage them to start their incursion into this world.

The way Inversa works is very simple. To begin with, organizations upload their invoices to the system, where the team's experts verify them. Then, they analyze them thoroughly, paying special attention to their accounts, their profitability, their ethical aspects and the financial health of their debtor to ensure that they can meet their obligations.

Once everything is verified to be correct, the invoices are posted. Next, savers browse the platform until they find a company they want to collaborate with, either because it aligns with their mission or because of the profit potential.

After confirming the transaction, the company receives the amount. However, it does not receive the full amount, as interest and commissions are deducted. In addition, 10% is retained, which is released once the debtor pays the money and is returned to the investor.

The efficiency of this solution is very high. More than 2,300 invoices have been financed this way, for more than 14.7 million euros, with an average return of around 6.65%.

Thanks to Inversa, more than 2,300 projects are transforming the world into a better place.

Alternative Financing crowdfactoring crowdlending ethical investing ethical investing platforms
Inversa Team
Inversa Team

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