The Beginner's Guide to Ethical Investing in 2026
You want your money to reflect your values. That is a reasonable expectation. It should not require a PhD in greenwashing to achieve it.
But here is the reality: the ethical investing industry is built on corporate self-assessments, blended scores that hide serious problems, and rating agencies paid by the companies they evaluate. An "ESG-approved" fund can hold defence contractors, companies with active environmental lawsuits, and firms convicted of labour violations -- all under a single reassuring label. In our analysis of popular ESG ETFs, 17 of 26 of the most common holdings scored negatively across our 11 ethical dimensions.
This guide does not sell you a narrative. It explains what ethical investing actually is, where the current system fails, and how to use independent data to build a portfolio you can stand behind.
The Three Approaches -- and Why They Matter
Ethical investing is not one strategy. It is at least three, and the differences determine what you are actually screening for.
Socially Responsible Investing (SRI)
SRI works through exclusion: remove tobacco, weapons, gambling, fossil fuels -- whatever conflicts with your values. The strength is clarity. If you do not want to hold weapons companies, you do not hold them.
The weakness is that exclusion says nothing about what remains. A portfolio that screens out weapons manufacturers might still hold companies with documented forced labour in their supply chains or active environmental litigation.
ESG Investing
ESG stands for Environmental, Social, and Governance. Unlike SRI, it attempts to measure how well all companies perform across these three pillars. ESG ratings from MSCI, Sustainalytics, and S&P Global drive thousands of "sustainable" funds.
The problem: ESG ratings are largely based on what companies say about themselves. And as we will see, that is not the same as what they actually do.
Impact Investing
Impact investing targets measurable positive outcomes -- affordable housing, clean water infrastructure, renewable energy in underserved regions. It is intentional: the goal is not avoiding harm but creating specific benefits.
Impact investing typically requires active selection of specific projects and is more common in private markets than public equities.
Why ESG Ratings Are Not Enough
ESG has become the default framework. Trillions of dollars flow through products carrying the label. But the system has structural problems that most beginners never hear about.
Companies Grade Themselves
Most ESG ratings rely on corporate sustainability reports, policy documents, and questionnaires -- filled out by the companies being rated. A firm that publishes a glossy 200-page sustainability report tends to score well. A firm that publishes nothing, regardless of its actual conduct, tends to score poorly.
Disclosure is rewarded. Silence is penalised. Conduct is secondary.
One Score Hides Everything
Traditional ESG compresses a company's entire ethical profile into a single letter grade. This destroys information investors need.
Consider Tesla. The company scores +40 on Zero Waste & Sustainable Products in our analysis, reflecting independently verified recycling rates exceeding 90% at its manufacturing facilities. But Tesla also scores -50 on Honest & Fair Business and -50 on Fair Pay & Worker Respect, reflecting over $99 million in regulatory penalties and 77 labour-related incidents since 2008, according to public records.
Tesla's average across all 11 dimensions is -10.5. A single ESG grade communicates none of this complexity.
Rating Agencies Disagree With Each Other
A widely cited MIT Sloan study found that ESG ratings from different agencies correlate at only about 0.54. Credit ratings correlate at roughly 0.99. When two agencies look at the same company and reach opposite conclusions, the methodology deserves scrutiny.
The Business Model Has Conflicts
Some ESG rating agencies sell consulting services to the same companies they rate. Others are paid directly by the companies being evaluated. This does not mean every rating is wrong. It means the incentive structure should give investors pause.
For a deeper look at where ESG ratings and independent data diverge most, see our analysis of 10 companies with the largest gap.
What Independent Data Reveals
When you score companies using court filings, regulatory penalties, and investigative journalism -- rather than corporate disclosures -- different patterns emerge.
The Scores Behind the Labels
Here is what our methodology shows for five of the most widely held companies in the world:
| Company | Traditional ESG | Mashinii Average | Highest Dimension | Lowest Dimension |
|---|---|---|---|---|
| Microsoft | MSCI AAA | +5.5 | Respect for Cultures: +50 | No War, No Weapons: -60 |
| Amazon | Various mid-tier | -10.0 | Planet-Friendly: +30 | Fair Trade: -40 |
| Generally strong | +2.3 | Planet-Friendly: +40 | Honest & Fair: -40 | |
| Meta | Included in ESG funds | -14.5 | -- | Safe & Smart Tech: -50 |
| Exxon Mobil | Various | -25.0 | No positive scores | Negative across all dimensions |
Every score above is derived from independently sourced, cited evidence. Not from what these companies chose to publish about themselves.
Microsoft receives the highest possible ESG grade from MSCI. It scores -60 on our weapons dimension, reflecting significant defence contract relationships documented in public procurement records. An investor screening for military exposure would find Microsoft among the most problematic companies in the S&P 500. A single AAA rating communicates none of this.
Search any company's full score breakdown
Four Principles for Evaluating Ethical Data
If ESG ratings alone are unreliable, what should a beginner look for? Four things separate useful data from marketing.
1. Independent sources. Court filings, regulatory enforcement actions, investigative journalism, and NGO reports exist in the public record regardless of corporate PR budgets. Any tool worth using draws primarily from these.
2. Multiple dimensions. A pharmaceutical company might excel on the environment but face serious questions about drug pricing. A tech giant might be carbon-neutral but monetise user data aggressively. You need to see each dimension separately.
3. Cited evidence. Every claim about a company's conduct should trace to a specific source -- a court filing, a regulatory penalty, an investigative report. Without citations, you are trusting an opinion.
4. Coverage that matches your portfolio. Many tools cover only a few hundred large-cap names. Mashinii scores over 5,300 companies across global exchanges, covering the vast majority of holdings in standard index funds and ETFs.
Learn exactly how our scoring methodology works
Step-by-Step: How to Start
You do not need to rebuild your portfolio from scratch. Five steps, starting with what you already own.
Step 1: Know Your Values
"Investing ethically" is too vague to act on. Be specific. Do you care most about climate? Worker rights? Data privacy? Animal welfare?
Browse the 11 dimensions Mashinii scores on and identify the three to five that matter most to you. Knowing that you care deeply about fair wages and environmental impact but are less concerned about financial inclusion gives you a decision framework.
Step 2: Audit What You Already Own
Most investors are surprised by what they find. If you hold index funds or ETFs, your portfolio likely includes hundreds of companies -- some with defence contracts, active environmental lawsuits, or documented labour violations.
Mashinii's portfolio audit takes your holdings and scores them across all 11 dimensions. It identifies gaps between your values and your investments, highlights the worst-scoring holdings, and shows where you have room to improve.
Audit My Portfolio -- it takes under 60 seconds.
Step 3: Research Alternatives
Once you know where the gaps are, use the company search to find alternatives. Every company page shows the full 11-dimension breakdown with cited evidence.
Key questions for any investment:
- What does the independent record show -- court filings, regulatory actions, investigative reports?
- How does it score on the specific dimensions you care about?
- How does it compare to sector peers? Check the rankings page for the best and worst-scoring companies by dimension.
Step 4: Look Inside "Ethical" Funds
If you are evaluating an ESG-labelled ETF, do not trust the label. Check the holdings. Our analysis of popular ethical ETFs found that many hold defence contractors, companies with documented labour violations, and firms with significant data privacy penalties.
Ask: What are the fund's top 20 holdings? How do they score on the dimensions I care about? You can look up every holding on Mashinii in minutes.
Step 5: Monitor and Rebalance
Companies change. New court filings emerge. Regulatory actions happen. A quarterly review of your portfolio's ethical profile catches shifts that annual reviews miss.
Mashinii scores update continuously as new independent data becomes available. Set a calendar reminder. It takes five minutes.
Six Myths That Keep People From Starting
Myth 1: Ethical Investing Means Lower Returns
The least supported objection and the most widely cited. Multiple large-scale studies over the past decade have found that responsible investment strategies perform comparably to conventional strategies over meaningful time horizons.
The logic is straightforward: companies with poor ethical practices face higher regulatory risk, more litigation, and greater reputational damage. Avoiding those exposures is not a sacrifice. It is risk management.
Myth 2: You Need a Lot of Money
You do not. If you hold a single index fund, you can audit it. If you are choosing individual stocks, you can search companies before buying. Many brokers offer fractional shares, making diversified ethical portfolios accessible at any budget.
Myth 3: All ESG Funds Are the Same
ESG is a label applied to funds with vastly different methodologies. Some exclude a few sectors. Others actively select for strong performers. The variation is enormous. Always look at the holdings, not the marketing.
Myth 4: It Is Only About the Environment
Environmental impact is one of 11 dimensions. You might care about data privacy, worker rights, corporate governance, animal welfare, or weapons and conflict. Ethical investing covers all of it.
Myth 5: Individual Investors Cannot Make a Difference
Capital allocation is one of the most powerful economic signals available. When investors move money away from companies with poor practices, it raises those companies' cost of capital. The growth of ethical investing from niche strategy to multi-trillion-dollar market segment has already changed corporate behaviour and regulatory expectations.
Myth 6: You Have to Get It Perfect
No portfolio scores perfectly on every dimension. A renewable energy company might have supply chain issues with rare earth minerals. A bank with strong community lending might score poorly on executive compensation. The goal is not perfection. It is intentionality -- making informed decisions about trade-offs rather than investing blind.
Quick Reference
| Step | Action | Tool |
|---|---|---|
| 1 | Identify the 3-5 ethical dimensions you care about | Browse all 11 dimensions |
| 2 | Audit your current holdings | Portfolio audit |
| 3 | Research individual companies | Company search |
| 4 | Check actual holdings of ESG-labelled funds | Company search |
| 5 | Review quarterly and rebalance | Portfolio audit |
Further Reading
- How our scoring methodology works -- the full explanation of our adversarial data pipeline
- 10 companies with the biggest ESG rating gap -- where traditional ESG ratings diverge most from independent data
- Inside "ethical" ETFs: what the holdings actually show -- what ESG funds really contain
- How to audit your portfolio for ethical risks -- a detailed step-by-step walkthrough
- Rankings: best and worst companies by dimension -- leaders and laggards across all 11 dimensions
Start With What You Already Own
You do not need a new strategy. You need visibility into what you already hold -- and whether the independent record aligns with what you value.
Mashinii scores companies across 11 independent ethical dimensions using court filings, regulatory records, and investigative reports. No self-reported data. No blended averages. Cited evidence you can verify yourself.