Ethical investing

Two investors can look at the same stock. Same expected return, same risk. Yet one buys it and the other will not — because that investor objects to what the business sells.

That filter is ethical investing. It means picking investments by moral principle, not just by return and risk. The workbook keeps this apart from sustainable investing, a term people often use for the same thing. Sustainable investing follows one broad, standard set of screening rules. Ethical investing is more personal. It rests on what one particular investor believes is right or wrong.

The workbook's own list of what ethical investing typically avoids: gambling, alcohol, smoking (tobacco) and firearms — sectors sometimes called "sin" industries. An investor following ethical investing rules these sectors out regardless of how attractive their expected return looks on paper.

This sits inside the wider portfolio construction process, alongside ESG investing — which screens for environmental, social and governance factors such as board independence, workplace safety and pollution — as one more input an adviser has to capture from the client before building a portfolio, since it can rule out entire sectors before return and risk are even considered.

Illustrative. Mr Desai has Rs 40,00,000 to invest and tells his adviser he will not hold any liquor, tobacco or gambling company shares, on personal principle, whatever their return prospects. His adviser identifies that a leading listed liquor company offers a strong dividend yield and would otherwise fit his income-focused portfolio.

Because of Mr Desai's ethical investing constraint, that stock is excluded from his portfolio entirely, and the adviser substitutes an FMCG stock with a comparable dividend yield instead — the filter is applied before, not after, the return comparison is made.

Chapter 15 (Portfolio Construction Process), section 15.7.2 (Understand ethical investing), defines the term and distinguishes it from sustainable investing, right after the chapter's discussion of ESG factors. Expect a question distinguishing ethical investing from ESG or sustainable investing, or one identifying which sectors the workbook names as typically excluded.

• Ethical investing and sustainable/socially conscious investing are not the same thing, even though the workbook notes they are often used as if they were — ethical investing is personalised to the individual investor; sustainable investing follows a broader, standardised screen.
• The workbook's named exclusions are gambling, alcohol, smoking and firearms — do not substitute a different list from general knowledge.