Overview
Ethics are a predefined set of moral principles or rules that help to guide the actions and behaviors of certain individuals, especially when they can, directly and indirectly, affect the lives of others.
When people follow ethical conduct, these principles are balanced with self-interest, relating to both the direct and indirect impact of behavior, decisions, and actions on those around them.
When people display unethical behavior, it can have a severe impact on others whether loss of employment, fines, penalties, imprisonment, reputational damage, and more. There are many things to consider where ethical trading is concerned both from the side of financial institutions and market participants, as well as that of traders and investors who choose to trade and invest sustainably.
A Brief History of Ethical Trading
A very strong influencing force behind ethical trading has always been personal lifestyle choices and/or religion. When traders follow a certain religion, they may be prohibited from investing in certain industries or companies that oppose the tenets of the religion that they follow.
A recorded account of ethical trading can be traced to the 18th century with the Quakers when there were members prohibited from spending either time or money on the slave trade. During the same era, the founder of Methodism, John Wesley, spoke out and preached about the avoidance of industries that may harm a person’s neighbor.
Another example of religious-based ethical investing and trading is Islamic trading or banking, which prevents followers from investing in, or trading, pork, alcohol, and several prohibited items.
In the 20th century, both ethical investment and trading increased in popularity because people around the world adopted new social views, which meant that these ethical choices were no longer heavily dependent only on religion.
Despite the time, ethical investments and trading typically reflect the stance on the political climate as well as certain social and lifestyle trends.
Between 1960 and 1970, some ethical investors emerged and focussed on companies that promoted workers’ rights and overall equality at all business levels, avoiding those companies that supported or profited from the Vietnam War, for instance.
In the 1990s, ethical trading shifted its focus to environmental issues and components, with most ethical investors boycotting coal and fossil fuel companies to support those who showed efforts in producing clean, sustainable energy.
Today, ethical trading continues to focus on the impacts of the environment, society, animals, and several other components that affect the willingness of investors to invest in certain companies and financial instruments.
The Importance of Ethics in Trading and Investing
The modern world in which we find ourselves is full of stories that tell of accounting fraud, market manipulation, schemes and scams, scandals, and many other misdeeds. These cases have led to the destruction of confidence that the investing public has in investment professionals and the global financial markets.
There have been countless surveys that show the low standing that financial service firms and banks have in the eyes of the public because of issues such as these. This brings about another problem as these institutions are tasked with the economic well-being and retirement security of society.
Throughout history, market regulators and governments from around the world have worked tirelessly to fight misconduct in the industry, implementing regulatory reform, which has had mixed results.
Many capital markets are well-regulated and protect their investors and other market participants from inherent harm, but these regulations alone are not enough to earn and keep investor trust.
Real-World Example of Unethical behavior in trading
One such instance where investors lost a significant amount of faith in financial institutions relates to the incident of the manipulation scandal in 2014, where five major banking groups were found guilty and had to conclude joint settlements with the United Kingdom, United States, and Switzerland.
These five entities were found guilty of the manipulation of foreign exchange rates, rigging profits to serve none other than themselves. An investigation was carried out by the Financial Conduct Authority (FCA) in the United Kingdom, and it was found that traders from all five banks were communicating through online chatrooms, planning on fixing trades.
These traders strategized the opening of trading positions at specific times, and they shared the confidential information of client orders before they fixed the trades, using this information to manipulate the fix in their favor so that they could profit.
The traders would sell euros to customers at the time of the fix and because they wanted a high fix to allow them to sell the euros at a higher price, they bought large volumes of euros before the fix which sent the value of the euro soaring.
This was achieved by anticipating the actions of the banks outside the chatroom by applying several scenarios. The traders were caught and after the investigations were concluded, the banks received fines of over 48.3 billion ZAR in 2014, followed by an additional 85.2 billion ZAR in 2015.
While many thought that the five banks would suffer significant reputational damage because of the scandal, the opposite was true, and the share prices of the banks soared, making it easier for the banks to settle the fines that they had received.
This is just one of many examples where a trusted entity had lost the trust of investors and traders alike. This is what makes the FX Global Code important, as it aims to promote the integrity and effective functioning of a robust, fair, open, liquid, and transparent Forex Market.
Through this, market participants can transact with confidence and in a manner that conforms to acceptable standards of behavior according to:
- Ethics means that all market participants must behave ethically and professionally so that the fairness and integrity of the FX market are upheld.
- Governance means that market participants must have sound and effective governance frameworks, providing clear responsibility for, and comprehensive oversight of their market activity.
- Execution means that market participants must exercise care when they negotiate and execute transactions.
- Information sharing relates to market participants being clear and accurate in the way they communicate and protect confidential information.
- Risk management and compliance, which means that market participants must promote and maintain robust control and compliance environment to identify, manage, and report any risks involved with their engagement in the forex market.
- Confirmation and settlement, which means that market participants must have adequate post-trade processes in place to promote predictable, smooth, and timely settlement of transactions.
Capital Market Sustainability and the Actions of a Single Entity
It is not just important that firms realize the impacts that they have across the overall investment community, but individual investors must realize the same. Global finance is interconnected in the modern-day, bringing to the fore increased considerations where market sustainability is concerned.
Investment professionals along with employers must commit themselves to the highest levels of ethical behavior, especially because it can influence the long-term health of the global financial market.
The global economy and marketplace are interconnected, which makes it important for every participant to realize their actions and how they may affect other participants across the world.
Investment professionals are therefore urged to consider how their investment decision-making processes can affect the overall global financial space in which ethical and professional obligations are applicable.
The Relationship between Ethics and Regulations
The rule of thumb is that those who are lawful will also act appropriately and in a way that will not negatively affect others. Many ethical principles cover certain components, including laws and regulations, working to ensure that the necessary constraints are prescribed on natural tendencies in self-interest.
These tendencies can harm the interest of others, and therefore existing laws and regulations act as a guide toward ethical behavior, but these do not always effectively cover all unethical behavior and practices.
Ethical behavior and legal contact can be differentiated by referring to legal behavior as something that is required while ethical behavior refers to morally correct conduct. Market regulators today do not have the right resources to enforce well-conceived rules and regulations.
For this reason, they rely on a regulatory framework that takes the lead in establishing and enforcing ethical behavior. However, there are still many challenges with this, which is why there should not be heavy reliance on compliance to ensure the ethical behavior of investment professionals or other market participants.
Ethical Trading and Traders
Many modern traders, especially millennials and younger generations, are more aware than ever of where their capital goes and what it is used for when they invest in a company or fund. These investors care about more than just earning a return on their investment.
Ethical investors want to know that their money has a positive impact on the world, and they are determined to ensure that trading activities are ethical while profitable.
Ethical trading is also referred to as socially responsible trading, which means that traders choose to invest in companies that operate in a way considered both ethical and socially responsible. This popular investment trend has resulted in the forming of many new socially responsible mutual funds, index funds, and various other assets.
Ethical traders care about more than the price of an asset they care about whether their investment has a positive impact and what it means for future generations.
Main areas of Sustainable or Ethical Trading
Sustainable Investing
There are many funds, exchanges, brokers, and investment houses that have started changing their ways to make way for sustainable investment practices. With large funds and financial institutions making a conceited effort to cater extensively to ethical traders.
Values-based Investing
There are many different forms of sustainable investing available today, whether it means buying shares of a company involved with the production of solar panels or biofuel, a company that participates in community loan funds, or others.
While investors and traders can achieve sustainable and ethical investing in several ways, at its core, the principle surrounds the use of money to bring about social change and a positive impact on the world.
There are several types of sustainable investors and participants in the various marketplaces, including:
- Development banks that serve low-income communities in disadvantaged, third-world countries.
- Pension plans that support environmentally-conscious corporations.
- Religious institutions
- Non-profit foundations and organizations
- Socially-conscious individuals
Environmental, Social, Governance (ESG)
Sustainable investing can be divided into three subheadings, with each representing a unique type of investment that falls under the same umbrella term “ESG” investment:
- Environmental – these investments examine how companies consider non-renewable resources, climate, and the shift towards green energy.
- Social – this considers human rights and concerns about diversity, including topics such as gender equality, support for underprivileged communities, and so on.
- Governance focuses on companies that promote business ethics, trust, transparency, and compliance in the overall marketplace.
Importance of Corporate Social Responsibility
There is no holy grail that will determine the exact factors involved with socially responsible activities, but there are a few voluntary standards that provide a comprehensive guide for companies who want to pursue social responsibility.
This also means that there will always be the issue of subjectivity where ethical trading is concerned. Ethical investors are inherently known to invest in companies that show consistent efforts to produce green power, or any other associated environmentally sustainable products.
Apart from also considering companies that show commitment towards Fair Trade, ethical investors also consider how companies source their materials, how employees are treated, the carbon footprint of the business, sustainable development plans and initiatives, and so on.
The Challenges that Ethical Trading faces
While the idea behind ethical trading is noble and it aims to achieve a pure purpose, there are difficult questions and ethical trading does not always come with easy answers. It may be very difficult to draw hard lines on which everyone will agree, especially when determining whether a company is truly socially responsible.
While many companies may meet a variety of criteria that will indicate their social responsibility, there may also be certain criteria where it underperforms. There is no set standard, even though there are guidelines and ethical traders must evaluate what they consider ethical, and what they value, and direct their investment and trading decisions accordingly.
The Ethical Issue
Ethical investing can be defined simply as traders purchasing financial instruments from issuers who act socially responsible and ethically. However, before delving into ethical trading, investors must establish their criteria so that they will determine which actions and practices they deem ethical.
This is where subjectivity plays a major role, and where there may be many controversies and conflicts as one ethical trader may differ from another. While there are distinguishable areas between different ethical traders, there are some areas where ethics are inherently known to direct investment and trading decisions.
Winning at the expense of Someone Else
In trading there will always be winners and losers, especially considering that it is a free-market economy. However, this is a concern when companies have monopolies as they can prevent healthy business competition from taking place, which is something that is considered highly unethical.
Certain medical procedures and Stem-Cell Research
There are some companies that profit from medical procedures and certain types of research that people consider unethical, criminal, and taboo, especially in Judeo-Christian communities, amongst several others.
“Sinful” Industries
The concept that surrounds a “sinful” industry is entirely subjective and there is a large portion of the investing public that consider things such as pornography, alcohol, casinos, and several other industries unethical.
While these industries have tried to raise public awareness to indicate the dangers of misuse and abuse of their products, many investors choose to boycott such companies.
What are Sustainable Exchange-Traded Funds?
Exchange-Traded Funds (ETFs) are a popular financial instrument that consists of a basket of assets that are spread across financial instruments such as stocks, commodities, and bonds. With ethical trading becoming increasingly popular in asset management, there are many ETFs aimed at attracting investment from ethical traders.
Ethical Shares
Equality
This is a very prominent ethical issue in ethical investing as many investors examine the equal opportunity policies of companies before they consider an investment. Fortunately, there are many funds and asset management companies that support this movement.
Animal Welfare
This relates specifically to cruelty-free investment, which has become another growing trend in investment. However, when ethical investment assets and financial instruments emerged and became widespread, animal welfare took a few years to catch on, taking position behind other issues such as human rights and carbon emissions.
However, in recent years, more funds focus specifically on companies that prioritize animal welfare and who offer cruelty-free funds, vegan ETFs, and many more.
Worker’s Rights
This is a high-profile issue and one of the first addressed when ethical trading became popular. It is something that many investors feel strongly about and while many large corporations exploit their workers, it is this type of behavior that investors refuse to support, forcing companies into becoming ethically and socially responsible or risk losing total investor attention.
Investment in organizations that have some of the best workers’ rights records is inherently profitable as these companies value their employees, resulting in improved returns for shareholders.
Environmentally Friendly Shares
Ethical traders who focus on these shares prioritize the environment above all other factors, but they may use strategies that include all aspects of ethical investments as they are all a part of social responsibility.
Traders who want environmentally friendly shares will invest in companies that produce green energy, electric vehicles, those who source recycled and environmentally friendly products, and those who keep a low carbon footprint, amongst others.
What Is Meant By Divestment?
Divestment refers to investors removing their capital from an investment. When investors do it for ethical reasons, it means that they close investments because they no longer match their morals or values.
Many investors use boycotting divestment strategies on companies that are ‘sinful’, unethical, or who partake in anything that is socially irresponsible.
What is a Financial Lens in Ethical Trading?
“Financial Lens” is the term that is typically used when describing the criteria that an investor will base their trading and investment decisions on. When traders select their ethical stocks, they use a rule-based approach in choosing a company that meets their values, depending on the daily practices and management decisions of the company.
There are several different types of lenses, and it simply means that investors target a specific ethical topic, and they research the actions and internal behavior of a company before they invest.
How to be an Ethical Forex Trader
The forex exchange market is the largest, most liquid financial in the world where trillions in trading volume is exchanged daily. There are several participants in the forex market, including some of the following:
- World governments
- Multinationals
- Banks
- Retail traders
- Retail investors
- Institutional traders and investors
Market participants trade currencies to conduct foreign business while retail traders and investors trade currencies to earn a profit. When using ethical trading in the forex market, traders must ensure that their investment decisions do not affect their objectives as ethical traders.
Traders can ensure that they trade forex ethically by:
- Investing in currencies of countries that are adopting and promoting sustainable policies.
- Using profits to finance other sustainable investments
- Choosing forex trading platforms and forex brokers who are known for their sustainable operating practices, for instance using more energy-efficient servers and technology.
FAQ
Is forex trading ethical?
Yes, it is ethical if you ensure that your actions do not adversely affect other market participants.
Is making a profit in trading unethical?
No, if profits are made fairly and legally, forex trading is considered ethical.
Can I use an eco-friendly trading strategy?
Yes, many different eco-friendly strategies can be used.
Is ethical trading profitable?
Yes, it is still a form of trading and investment where profits can be earned.
How can I make an ethical investment?
By registering an account with a broker that offers ethical investment and trading opportunities.
Why are so many people interested in ethical investments?
Sustainable trading and investment allow traders to take part in creating a better future for generations to come. These traders want to make profits while having a positive impact on the world.
Which sectors allow for sustainable trading and investing?
You can trade sustainability across all sectors where companies are offering sustainable investment and trading instruments.
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