Ethics Vs. Profit: Finding the Perfect Balance in Making Investment Decisions

There has always been an interplay between profit-making and ethics, two seemingly contradictory forces in business. While on one hand, the primary goal of any business is to turn a profit consistently, it is also expected to conduct itself ethically across its operations.

For decades, financial institutions have been able to maintain some measure of synergy between profit and ethics. Thanks to regulatory bodies,  compliance with the law has been maintained as well as a certain level of corporate responsibility to ensure positive relationships with stakeholders. In a broad sense, this approach in itself was considered ethical. Today, stakeholders are demanding a more balanced and equitable mix between investing and ethics. This change becomes increasingly important when you consider that we are in an era where the decisions of the financial industry have had far-reaching impacts on global society. The ethical dimension of these decisions becomes as crucial as their economic outcomes. This growing need to directly merge finance with more ethical and responsible considerations is tagged Sustainable Investing.

What is Sustainable Investing?

Sometimes referred to as Socially Responsible Investing (SRI), ethical investing, or impact investing, it is a fundamental departure from traditional investment models that predominantly focus on financial returns. Instead, it incorporates a holistic perspective that seeks to reconcile profit-seeking with a broader commitment to Environmental, Social, and Governance (ESG) considerations. 

Sustainable investing goes beyond mere financial or corporate considerations. It seeks to address the pressing challenges facing society. By factoring in ESG criteria, investors aim to allocate capital to companies that not only demonstrate strong financial performance but also exhibit responsible and sustainable business practices. This alignment of financial goals with broader societal objectives represents a profound shift in the way investments are evaluated and selected.

Why is Sustainable Investing Important?

Over the years, certain unethical elements within the global financial industry have taken advantage of the lack of financial insight within the general public. Just like the Enron fraud case but luckily, times have changed as the modern average Joe and Jane have more knowledge and interest in the institutions that run the economy and society. This makes it harder to be involved in unethical operations for the sake of profit. A popular example of this is the GameStop debacle from a few years back.

Research also shows that when an organisation is seen as ethical and socially responsible, it is more likely to be accepted by the growing Millennial and Gen Z demographic. This realisation of increasing stakeholder agency and the growing influence of the finance industry over geopolitics and global economics has evolved sustainable investing from a niche concept championed by a select group of values-driven investors; to a mainstream investment strategy embraced by institutional investors, asset managers, and corporations worldwide.

Sustainable Investing is Not a Perfect Solution (Yet)

As exciting as it sounds, sustainable investing is not a magic bullet as it has its attendant challenges. For one, it's still a relatively new concept! Many factors surrounding it are still being tested and optimised, particularly the accurate tracking and measuring of results. Due to the intangible nature of some ESG factors, there isn’t a standardised means to determine and analyse metrics. However, this is a temporary issue in my opinion. It is  anticipated that as more people employ sustainable investing, measurement methodologies will become more refined.

Another challenge is the sheer amount of misconceptions surrounding sustainable investing. Let me be as plain as possible: sustainable investing is not about investing in organisations that just tout ESG or address societal issues - Hello! Green and Bluewashers! Sustainable investing is allocating capital to organisations with strong financial performance as well as responsible and sustainable business practices. As investors and professionals, we will need to educate ourselves to be able to debunk these misconceptions and better understand the nature and impact of the concept, for our clients, the industry and our sustained relevance as professionals..to be honest.

How May I Use Invest Responsibly and Maximise Profit?

Here are a few steps you can take to improve how you balance ethics and profit seeking:

• Balance your short-term vs long-term outlook: Warren Buffet once famously said “Our favourite holding period is forever”. In simpler words, don’t just focus on fancy buzzwords or raise-stock-quick strategies designed to boost the price of an asset in the short term. Instead, focus on the fundamentals; the governance structure of an organisation, its supply/value chain, the values underpinning its operations, and its positioning in its market and environment. These factors will give you a clear picture of where to place your funds. They also give you defined markers for when to divest if/when those fundamentals are subsequently ignored.
• Define your sustainability framework/investment theses: Start by establishing a clear ethical framework that outlines your values, principles, risk appetite, priorities, and objectives. This framework works as a guide, helping you make ethically sound and sustainability-minded decisions even as you pursue profit. When designing this framework, it is critical to involve your key stakeholders to ensure optimal alignment.
• Do not skimp on due diligence: This is the foundation that underpins any type of investment. It is even more crucial when balancing profit and ethics. Now, your due diligence goes beyond corporate, operational and finance assessments. It must include thorough ESG assessments, as you scrutinise organisations' ethical practices more closely, from environmental impacts to governance structures. This comprehensive approach aligns financial objectives with ethical standards. 
• Look beyond the balance sheet: To truly balance profit and ethics, you will need to look past the numbers to analyse the viability of a potential investment. By incorporating ESG factors into traditional financial analysis, you can execute a more comprehensive assessment of your investment opportunities. You can also go a step further by actively seeking investments that generate measurable positive social and environmental outcomes. This approach aligns profit with purpose by channelling capital towards solutions to pressing global challenges, such as any of the UN Sustainable Development Goals (SDGs).
• Audit, assess, and iterate: As I have mentioned earlier, this balancing act is a relatively new concept for all. To perfect it, you will need to continuously measure and evaluate your results. By doing so, you can refine and iterate your frameworks and strategies. In time, you would have created a well oiled sustainable and profit-raking machine. 

In conclusion, there is no single correct answer to what the perfect balance between ethics and profit is. Global finance is way too broad and complex for a one size fits all solution. Here's what I can tell you though: Try, try, try. Take a step towards the future, redefine your frameworks, educate yourself on sustainablity and how it relates to finance within your region, consider a long term outlook, and practice sustainable investing according to the needs of your environment. I guarantee that in time, you will find a balance that works best for you.

PS: I'd love to hear about projects and organisations that would be great options for investors who are actively seeking investments as described above in Nigeria and across Africa.