Ethical trading refers to the practice of making investment decisions based on moral principles and values, alongside traditional financial considerations. This approach often involves evaluating companies based on their environmental, social, and governance (ESG) practices. Ethical traders seek to support businesses that promote sustainability, social responsibility, and good governance, while avoiding those involved in harmful activities such as environmental degradation, labor exploitation, or unethical governance practices.

Ethical trading influences trading decisions by incorporating non-financial criteria into the investment process. Traders and investors use ESG metrics to assess the long-term viability and ethical impact of a company. For instance, they may favor companies that prioritize renewable energy, reduce carbon footprints, or maintain fair labor practices. Conversely, they might divest from companies involved in controversial sectors like tobacco, fossil fuels, or weapons manufacturing.

This approach can lead to more sustainable and socially responsible portfolios, aligning investments with personal or institutional values. Additionally, ethical trading can mitigate risks associated with reputational damage, regulatory changes, or consumer backlash against unethical companies. By integrating ethical considerations, traders can contribute to positive societal change and promote a more sustainable and equitable economy, while potentially achieving competitive financial returns. This dual focus on ethics and performance underscores the growing importance of ethical trading in today's investment landscape.