A Beginner Guide to Understanding Ethical Investing
Understanding the concept of ethical investing
Many people often ask, what is the point of learning Islamic finance? One of the most important topics that sparks interest in Islamic finance is ethical investing. Based on request, we have therefore decided to dedicate the first Friday of every month to discussing ethical investing in very simple terms, making it easy to understand, get started and build wealth the halal way.
If you missed Friday’s edition, we discussed Kogi States plan to issue 50billion Sukuk to fund infrastructure project, catch up here. If this newsletter was forwarded to you, subscribe here for free:
Concept of Investing
Many individuals with a steady flow of income, whether from a business or a salary often keep their money in a savings accounts. These may be with Islamic banks, conventional banks, or popular digital banking platforms such as Kuda, Opay, etc. This is where the idea of investing becomes necessary, especially in a country like Nigeria, to beat inflation.
Inflation quietly reduces the value of your money over time. It is the gradual loss of purchasing power, reflected in a rise in the prices of goods and services. In simple terms, inflation occurs when the prices of items such as food, transportation, rent, fuel, school fees, and other essentials increase something that is a daily reality for many Nigerians.
If your money is just sitting in your savings account, it steadily loses purchasing power. What ₦100,000 can buy today will buy much less in a few years. This is why investing should not be seen as an option, but rather as a key skill for financial survival.
In simple terms, investing means putting your money into something today so it can grow and give you more money in the future. Instead of keeping all your funds in a savings account, you invest in things like shares, property, or mutual funds, with the expectation that the value will increase or that they will generate income over time.
Ethical Investing Explained
Ethical investing can be seen as an investment strategy where an investors ethical values, which may be moral, religious, or social are the primary drivers, alongside the goal of earning decent returns. Ethical investing does not mean giving up returns as many might perceive it to be. The objective remains to achieve returns, but without compromising personal, religious, or social values.
Ethical investing goes beyond simply putting funds into any investment, especially in this era marked by a rise in suspicious and illegal investment schemes. As a result, many individuals who want to invest are increasingly insisting that the companies they invest in have real impact whether through direct economic contributions, social change, or broader societal value.
An ethically conscious investor, for example, may choose not to invest in a betting company. Why? Betting typically involves wealth transfer rather than wealth creation. It largely moves money from individuals often low-income earners to operators, instead of generating productive economic value, and it can also reduce overall productivity.
Ethical investing is for investors who want their money to support noble causes. For instance, if an investor believes that tobacco is harmful to health, they would avoid companies that produce tobacco or hold investments in tobacco-manufacturing firms.
Common Types of Ethical Investing
Environmental, Social and Governance: ESG investment strategies focuses on ownership in businesses that follow good corporate, social and environmental practices. ESG funds considers the potential effects that environmental, social and governance factors may have on a company’s performance when making investment decisions.
Impact Investing: Impact investing is often used to describe an investment strategy where ethical improvements or positive results for the community and environment take precedence over fund performance or financial returns. Examples of this include investing in non-profits or businesses producing or using clean technology.
Socially Responsible Investing: Socially responsible investing means avoiding investments in companies or industries that harm society or the environment. It focuses on staying away from businesses that promote addiction, violence, or environmental damage, or that go against social justice and sustainability.
That is why SRI funds do not invest in industries such as gambling, guns and ammunition, tobacco, alcohol etc.Faith-Based Investing: Faith-Based Investing is an investment approach in which financial decisions are guided by the moral, ethical, and religious principles of a particular faith, alongside the objective of generating competitive returns. Under this approach, capital is often allocated to investments that align with faith-based values, while activities considered unethical or impermissible are deliberately avoided.
Shariah Based Investing
You might start to wonder what category shariah-based or halal investing falls under and what are the similarities with ethical investing, we touched on this in one of our previous editions. Catch up here.
Shariah-based investing falls within the category of faith-based investing and will be the primary focus of subsequent editions of this series. Notably, Shariah-compliant investing extends beyond religious observance to incorporate elements of impact investing, socially responsible investing (SRI), and environmental, social, and governance (ESG) principles, reflecting its emphasis on ethical conduct, social welfare, and sustainable economic development without compromising on shariah law.
Key Takeaway
One of the core objectives of ethical investing is to avoid allocating capital to companies or financial instruments whose products or activities conflict with an investor’s social, moral, or religious values.
Investors often chooses ethical investing not only to generate returns but also to contribute positively to society. In this approach, the primary motivation is alignment with moral, social, and religious principles, with financial returns pursued within these boundaries.
Ethical investing is a deliberate and intentional strategy, requiring careful research and due diligence to identify opportunities that genuinely reflect an investor’s values.
As mentioned earlier, every first Friday of each month will be dedicated to discussing halal investing. We will break down what it means to invest the halal way and share practical, step-by-step guidance to help you get started.
I am considering tagging this series “The Halal Money Series.” Let me know what you think.
We meet again next week.
Yours in Ethics
If you’ve ever wondered how to invest without compromising your values, this is worth the read. Excited to see where The Halal Money Series goes