What is ethical investing?

Do you want your investments to potentially grow while also reflecting your values? Ethical investing may help you do both by using clear rules to select companies that demonstrate fair business practices which may include consideration for human rights, environmental risk management, and transparent models, among others. This approach is not just about feeling good – it is about a disciplined process that may potentially reduce risks such as safety lapses, weak corporate controls, or poor climate management. It may also result in growth opportunities over the long term if companies continue these responsible practices.

Table of contents

• What are ethical investment funds?
• What makes a fund ethical?
• Benefits of ethical fund
• Who should invest in an ethical fund?
• How can one invest in an ethical fund?

What are ethical investment funds?

Ethical investment funds are pooled vehicles such as mutual funds, ETFs, or managed accounts that apply value-based and responsibility-based criteria to invest your money. They consider conventional financial metrics (potential growth, cash flows, competitive advantage) and add environmental, social, and governance checks. The aim is simple. Avoid businesses that conflict with widely held values or have unmanaged risks.

India has a handful of thematic mutual funds that use the term ‘ethical fund’ and are generally benchmarked to Shariah indices. However, in a broader sense, ethical investing can also cover ESG (Environmental, Social, and Governance) and responsible investment strategies that aim to align financial growth with social good.

Also Read: What are ESG funds and how they work

What makes a fund ethical?

A fund may be dubbed ‘ethical’ if it invests in the types of businesses mentioned above. Here are some processes such funds may follow

1. Negative (exclusion) screens: Such screeners may remove companies linked to businesses that investors may wish to avoid.
2. Positive (best-in-class) screens: The fund may seek out companies that score better than peers on specific practices like recycling rates, workplace safety, supply-chain audits, or independent boards.
3. Norms-based checks: Funds compare companies against widely accepted standards on labour rights, anti-corruption, and environmental responsibility. If a company repeatedly violates these norms and does not fix issues, it risks exclusion.
4. ESG integration: Analysts include material environmental, social, and governance factors in valuation and risk work. For example, a company with heavy water usage in water-stressed regions might face higher costs or production disruptions over time. Integrating these factors into the selection process may give a clearer picture of potential downside and upside.

Benefits of ethical fund

Some potential benefits of ethical funds are:

• Values alignment without losing discipline

Such funds help you invest in a way that reflects your priorities and values such as support for cleaner operations, fairer workplaces, enhanced oversight. Your portfolio may feel more purposeful because it matches what you support in daily life.

• Increased awareness of potential hidden risks

Corporate failures can sometimes be traced back to poor controls, weak culture, or ignored environmental exposure. Ethical processes may put these issues under the spotlight. That does not eliminate risk, but it may help identify such challenges early.

• Reporting and accountability: You might gain more transparency into how your money is used. That reporting, over time, may build trust and give you the data to rebalance if a fund drifts from its stated approach.

Who should invest in an ethical fund?

You may consider an ethical fund if you want to invest for the long-term and care about how a company runs its operations. It may suit you if you:

• Prefer to avoid specific industries
• Seek investments that aim to minimise exposure to lapses in governance or business integrity
• Are comfortable with the fact that ethical styles may see cyclical ups and downs

How can one invest in an ethical fund?

You may invest in an ethical fund by following the steps below:

1. Pick the approach that fits you

• If your focus is “do no harm”, you may want to look for exclusion-led or best-in-class strategies.
• If you want mainstream diversification with added risk checks, you may want to look for ESG-integration strategies.
• If you want targeted outcomes, you might consider thematic or impact funds focused on climate, water, circular economy, or social inclusion.

2. Examine the policy and the holdings

Read the scheme documents and any stewardship report. Check how exclusions are defined and whether the voting record supports the stated policy. Scan the top holdings. If a fund claims strong screens but owns names that clash with your red lines, you might want to move on.

3. Evaluate performance in a suitable way

Look at returns data and compare the fund’s performance to its benchmark and peers. You may look for consistent process, relatively steady long-term growth, and controlled drawdowns during stress.

Past performance may or may not be sustained in future.

4. Review annually

Once a year, you might want to check whether the fund kept its screens, improved disclosure, and voted in line with its policy. Rebalance to your target weights. If the fund’s approach drifts or communications become vague, you may consider switching to a clearer option.

Also Read: What is a mutual fund?

Conclusion

Ethical funds give you a way to combine investing with social responsibility. The core idea is not to chase a trend, but to embed sensible responsibility checks into a standard investment process. By defining clear red lines, seeking out companies that run ethically as per your standards, and using your shareholder vote, you may improve the quality of your portfolio’s potential earnings.

FAQs:

What are ethical funds?

Ethical funds are investment products that consider environmental, social, and governance factors, along with standard financial analysis when choosing what to own. They avoid activities that conflict with widely held values and prefer companies that manage key risks and responsibilities well. In plain terms, you may pursue potential returns while setting boundaries on what your money supports.

What defines an investment fund as “ethical”?

A fund is deemed ethical when its policy is clear, its rules are applied consistently, and its actions match its words. You may want to look for documented exclusions, defined positive screens, integration of relevant ESG risks into research, and evidence of active voting and engagement. Most importantly, it is advised to check whether the reported portfolio and the voting record actually reflect that policy.

What is the difference between SRI, ESG, and impact investing?

• ESG describes the factors such as environmental, social, and governance that analysts include in financial research to understand potential risk and opportunity.
• SRI (Socially Responsible Investing) usually starts with values-based exclusions and, in some cases, tilts toward companies seen as more responsible.
• Impact investing targets a specific, measurable outcome such as avoided emissions, improved access to services, or better resource use alongside financial return.

How do ethical funds screen out industries or companies that are not aligned with their ethical models?

Each fund may have their own specific processes, but some tools could be as follows:

• First, negative screens block sectors or activities above a defined revenue threshold.
• Second, norms-based checks flag repeated breaches of recognised standards on labour rights, anti-corruption, or environmental responsibility.
• Third, controversy filters track serious incidents like data leaks, safety failures, spills and place companies on watchlists or exclude them if remediation is weak.
• Some funds may add positive screens to reward leaders on energy use, safety, supply-chain audits, or board independence.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

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