Fair Trade Investing: What It is, How it Works

What Is Fair Trade Investing?

Fair trade investing refers to investing in companies or projects that promote fair trade with producers in developing nations. Basic fair trade philosophies call for a living wage for suppliers of raw goods and materials, as well as respect for strong environmental practices and a focus on the trading relationships between advanced economies and developing nations.

Key Takeaways

The fair trade movement seeks to promote sustainable development, small-scale production, fair wages and prices, and environmentally-friendly business activities.
The words "fair trade" are a reference to "free trade," the economic philosophy that promotes open borders and globalization.
The fair trade movement is a group of certifiers and membership organizations that identify products and brands that use fair trade business practices, especially in developing nations.
While there is no universal definition for "fair trade," there are mutual funds and other investment products aimed at retail investors who wish to support fair trade practices.
The largest group making fair trade determinations and certifications is the World Fair Trade Organization (WFTO).

Understanding Fair Trade Investing

Fair trade investing typically deals with trade in agricultural products such as coffee, sugar, and textiles. These crops are typically grown in plantation-style monocultures, with high environmental and social costs. Some fair trade organizations also support factories with unions and living wages, as opposed to less desirable working conditions commonly seen in fast fashion production facilities

The term "fair trade" was coined in relation to the phrase "free trade," the economic philosophy of open borders and markets that became popular in the 1980s and 1990s. Free Trade Areas such as North American Free Trade Agreement (NAFTA) raised concerns that communities and livelihoods could be threatened by globalization, as international competition forced workers and producers into a race to the bottom.

In opposition to commercial planting, fair trade seeks to promote small-scale production, sustainable agriculture, and humane wages and working conditions.

Several organizations offer fair trade certifications, allowing socially conscious consumers to support ethical business practices by purchasing products with a fair trade label. These organizations aim to help these workers gain a higher standard of living and financial independence, while the companies that actively promote fair trade can show transparency in their business dealings and gain valuable image points with the public and their shareholders.

Principles of Fair Trade

While there are several different fair trade labels, certifications, and organizations, they share similar goals. These groups work to ensure certain companies engage in fair prices and wages, support marginalized producers, and use environmentally friendly business practices. One of the largest is the World Fair Trade Organization (WFTO), with over 400 member organizations and networks dedicated to supporting businesses that prioritize people over profits.

The WFTO publishes a list of ten principles of fair trade. They are:

Creating opportunities for economically disadvantaged producers
Transparency and accountability
Fair trading practices
Payment of a fair price (including wages)
Ensuring no child labor and forced labor
Commitment to non-discrimination, gender equity and women's economic empowerment, and freedom of association
Ensuring good working conditions
Providing capacity building
Promoting fair trade
Respect for the environment

Similar lists are published by other fair trade certifiers, but not all fair trade organizations are equal. While some fair trade organizations will allow their label to be used by brands that follow specific fair trade business practices, the WFTO evaluates the entire supply chain to ensure the consistent application of free trade principles.

How to Invest in Fair Trade

There is no universal agreement on what constitutes fair trade, and investors should be careful to research a company's business practices before committing their money. There are many socially responsible mutual funds, exchange-traded funds, and other investment products that focus on environmental or socially desirable outcomes, including fair trade practices.

Many investors use environmental, social, and corporate governance (ESG) criteria to identify investments with desirable environmental or social outcomes. These funds often focus on renewable energy, sustainable agriculture, social justice, carbon trading, or other ethical business practices.

Socially responsible investing seeks to generate financial profits as well as social impact, and these goals do not always go hand in hand. A socially responsible investment does not necessarily provide investors with a good return, although there is some evidence that ESG funds may be able to outperform the wider market.

Is Fair Trade Profitable?

Fair trade investing can be profitable depending on the investment horizon and goal. For example, an investor may choose to invest in an ETF that tracks fair trade companies that pay a quarterly dividend. In this scenario, they are always at least making a small percentage for holding that security. As with any investment sector, it cannot be said whether or not an investment will be profitable. Rather, many investors choose to invest in fair trade companies and securities products to help offset the less favorable business practices of some of their other investments.

What Is the Fair Trade Minimum Price?

The fair trade minimum price, commonly referred to as the fair trade price, is a minimum price for a commodity that is set to ensure a number of benefits to the workers such as basic needs, humane working conditions, community development, and environmental protection. These prices are constantly monitored and adjusted by groups such as the Fair Trade International Standards Committee.

Who Benefits From Fair Trade?

Everyone can benefit from fair trade practices. The production company can receive the minimum amount required in order to meet the basic needs of their workers while continuing to operate, consumers benefit from knowing their products came from an organization dedicated to treating people well, and the worker producing the good is paid a livable wage.

Finally, an investor could benefit through gains on their investment, having the knowledge they are putting their capital into organizations committed to fair pay and working conditions.

What Are the Cons of Fair Trade?

Although there are many benefits to fair trade and fair trade investing, there are some cons. The most obvious is that by ensuring that a fair trade minimum price is paid, this increase in cost for the supplier or distributor is often passed on to the consumer. Typically, fair trade products carry a slight premium over organizations that do not engage in the same practices. Because of these increased costs, an ETF or mutual fund could carry a higher load than other similar products. Companies that attempt to fair trade certify could spread their workload over fewer paid employees, which has the potential to increase pressure on those employees to carry an additional workload.

The Bottom Line

Fair trade is a business practice that not only benefits the workers and the organizations employing them, but can benefit a savvy investor as well. As more investors begin to consider the impact of their investments, fair trade investing is no longer a niche consideration. Although there are some cons, such as a price increase being passed to the consumer, there are many benefits that make fair trade investing an attractive consideration.