Exploring ethical investing, trading and green stocks

Written by: Evan Rouse | Financial Writer

What is ethical investing?

Ethical investing involves purchasing shares in companies that align with your values, such as those committed to environmental sustainability, social responsibility and ethical governance. When you invest ethically, you own a stake in the company, so you’ll support its long-term growth and positive impact. It’s an approach that typically focuses on holding investments over the long term, which allows you to contribute to the success of companies that share your ethical and sustainability goals.

Ethical investing: benefits and challenges

Benefits

• Long-term growth potential: Green sectors like renewable energy, sustainable tech and clean transport are expanding, potentially offering promising returns for long-term investors.
• Positive environmental and social impact: By supporting companies with strong Environmental, Social, and Governance (ESG) credentials, you help fund initiatives that tackle climate change, improve labour conditions and promote corporate responsibility.
• Values-based investing: Ethical investing allows you to align your portfolio with your personal beliefs and support businesses that prioritise sustainability, equity and transparency.

Challenges

• Greenwashing risks: Some companies may overstate their ethical practices, making it important to assess ESG claims using independent ratings and reports.
• Volatility: Green sectors can be highly reactive to regulatory changes, innovation cycles and shifts in consumer sentiment, which may affect stock performance.
• Varying ESG standards: Definitions of what qualifies as ‘ethical’ can differ across rating agencies, making it harder to compare companies and build a consistent ethical portfolio.

What is ethical (green) trading?

Ethical or green trading refers to speculating on the price movements of ethical or environmentally responsible companies, commonly known as green stocks, without taking ownership of the shares. Instead, you use instruments like CFDs (contracts for difference) to go long (buy) or short (sell) on green stocks.

Unlike ethical investing, ethical trading is typically short or medium-term and aims to capitalise through speculation on market movements, rather than support a company’s mission through shareholding.

Ethical trading: benefits and challenges

Benefits

• Flexibility and speed: Ethical trading, through instruments like CFDs, lets you quickly respond to market movements in green sectors without needing to buy and hold physical shares.
• Profit potential in both directions: With ethical trading, you can go long or short on green stocks, giving you the potential to profit from price rises and declines.
• Lower capital requirements: Trading often requires less upfront capital than traditional investing. This makes it a great option if you want to engage with ethical markets but aren't ready to commit to long-term investments.

Risks

• Short-term focus: Trading typically doesn’t contribute to a company’s long-term mission in the way that investing does, which may feel less impactful if you are a values-driven individual.
• Higher risk exposure: The leverage involved in CFDs can amplify both your gains and losses, making risk management crucial.
• Ethical ambiguity: Trading can involve speculating on the short-term decline of companies, even ethical ones. This could feel at odds with a purely values-based approach.

What are green stocks?

Green stocks are associated with companies that prioritise sustainability and eco-friendly business practices. These businesses focus on reducing carbon emissions, using renewable energy sources, and promoting resource conservation and equity.

Green stock characteristics

While there’s no set criterion for what makes a green stock, companies that are often considered green share several characteristics, including:

• Environmental responsibility: Green companies actively reduce their environmental impact by lowering pollution, managing waste sustainably and adopting responsible business practices.
• Renewable energy initiatives: Many green stocks come from industries that focus on replacing fossil fuels with clean alternatives, such as solar, wind and hydropower energy.
• Sustainable innovation: Green companies often develop and promote products and services that support sustainability, such as electric vehicles, biodegradable packaging and energy-efficient technologies.
• Corporate social responsibility (CSR): Green companies typically have strong ethical governance policies, which include fair labour practices and transparency, reinforcing their commitment to social responsibility.

Green stock examples

Several companies exemplify green stock characteristics. Two notable mentions include:

Enphase Energy (NASDAQ: ENPH): A global leader in solar energy technology, specialising in microinverters and battery storage solutions, helping to expand the use of renewable energy.

NextEra Energy (NYSE: NEE): A large producer of wind and solar energy, committed to clean power generation and a sustainable future.

Green investing: how to get started

The first thing you’ll need to do is open an account with a stockbroker. This is because the shares trade on an exchange, and only registered brokers can carry out transactions there. You’ll then use the stockbroker’s platform to buy and sell shares.

You can normally choose whether to buy a specific number of shares in a company, or to invest a certain amount of money to be invested in the shares on your behalf.

Green share trading: how to get started

Want to speculate on green stocks without owning the underlying assets? CFDs let you profit from rising or falling prices of ethical companies.

Steps to start trading green stocks:

1. Research the market and understand the risks and rewards.
2. Open an account with a reliable broker like Pepperstone.
3. Search for green stocks that fit your strategy.
4. Place a long or short trade with appropriate risk management in place.

Green stock trading styles to consider

When speculating on green stocks, your trading strategy can influence both your risk exposure and potential returns. Different trading styles suit different timeframes, risk appetites and market conditions. Here are three common approaches to consider trying:

• Scalping: This high-speed strategy involves placing many trades within seconds or minutes, aiming to profit from very small price movements. Scalping green stocks requires quick decision-making and close attention to short-term volatility, often using automated tools with tight risk controls. This is especially important, as the fast pace and frequent trades can lead to significant losses if not carefully managed.
• Day trading: Day traders open and close positions within the same trading day, avoiding overnight exposure to market-moving news. This style may suit you if you want to actively respond to intraday price movements in ethical sectors. However, it carries the risk of rapid losses due to sudden market swings and poor timing.
• Swing trading: Swing traders hold positions for several days or even weeks to capture medium-term trends. This approach can work well in green sectors driven by news, earnings or regulatory changes, such as solar power or electric vehicles. However, holding positions overnight can expose you to risks from unexpected news or market gaps.

Shared principles for ethical investors and traders

Whether you're investing or trading, many of the same principles apply when evaluating green stocks:

Researching ethical companies

Before you invest or trade in a green stock, you may want to evaluate its ethical and environmental credentials. Here's how you can do so:

• Check ESG ratings from providers like MSCI, Sustainalytics, and Morningstar to assess the company’s environmental, social and governance performance.
• Review CSR reports to understand the company’s sustainability goals and social initiatives.
• Assess business practices - look for active investment in renewable energy, ethical labour standards and efforts to reduce environmental impact.
• Watch for greenwashing by comparing a company’s sustainability claims with independent news and reports.

Environmental and social sustainability criteria

Look for companies that:

• Reduce environmental impact through renewable energy, waste management, and carbon reduction.
• Support fair labour practices with ethical treatment of employees and suppliers.
• Promote sustainable supply chains that follow fair trade and responsible sourcing principles.
• Engage in community development by investing in education, healthcare or infrastructure.
• Practice transparent governance with clear CSR policies and ethical leadership.