Have you heard of the concept of sustainable investing? Responsible investing? Environmental sustainability investing?
Or impact investing?
There’s a lot of excitement about this form of investing right now—and for a good reason. In this article, we look into sustainable investing, how you can invest, and the best sustainable investments to make. Let’s go!
What Is Sustainable Investing?
Sustainable investing is a new way for investors to put their money to work that does more good than merely making money. It can have a massive impact on the world. One of the most important things about investing sustainably is that it helps us build a sustainable future.
You don’t hear as much about sustainability investing because it’s not something traditional institutions put into practice as much as possible. However, with rising interest in socially-minded investments and awareness of the need to rebuild and protect our planet, sustainable investing is gaining popularity.
Sustainable investments have three aspects to look into before getting into any fund: the environment, social, and governance, or ESG.
Environment Impact
In a sustainable investing context, the environmental impact is how much of an effect a company has on the environment.
Sustainable investing focuses on companies developing carbon-free energy or using efficient energy technologies to reduce their power consumption.
Social Impact
Positive social investing focuses on companies that evaluate the influence on all stakeholders when deciding about their operations. Companies might choose to engage in social projects such as promoting gender equality, promoting healthy working conditions and lifestyles, tackling economic disparity, and showing a commitment to charity undertakings.
Companies that support the community and eradicate poverty through their business practices are considered socially conscious. They help local farmers, provide educational opportunities for local children, and ensure their business practices don’t harm employees or trade partners.
Governance
Solid corporate governance systems have policies and mechanisms that handle conflicts of interest among stakeholders. They also have an independent board of directors and an audit committee that works to defend shareholders’ interests over those of the company’s management team.
Here are a few good governance qualities:
- Monitoring businesses for corruption.
- Making sure they follow international standards.
- Making certain businesses contribute to the political and economic development in their region.
Why Invest Sustainably?
Simply reading the news will provide you with a few compelling arguments for why you should start supporting sustainable investments. Our scarce natural resources, exploding population growth (9 billion by 2050), growing urbanization, and old and inadequate infrastructures are all factors that must be addressed soon.
From an objective standpoint, we cannot continue to support industries and firms that do not adequately handle the risks associated with lousy environmental issues, social issues, and corporate governance. Sustainable firms and projects answer to the demand for cleaner, leaner, and more sustainable products and services, which will give shareholders the most value in the long run.
Why Is Sustainable Investing Essential?
While there is no assurance that an investment will be successful, the performance of sustainable funds has typically been similar to the performance of traditional funds, and some research has shown that sustainable funds may even outperform traditional funds.
Sustainable funds may give investors a lower downside risk level than typical funds in a bear market. According to Morningstar statistics, 24 out of 26 ESG index funds (funds that include environmental, social, and governance aspects) outperformed traditional funds during the first quarter of 2020, despite the market crash caused by the C-19 pandemic.
How Do You Invest in Sustainable Companies?
Here’s how you can get started in sustainable investment and avoid typical pitfalls:
1. Start with sustainable funds.
When I started investing in sustainable finds, I concentrated on what were then referred to as “socially responsible” or “socially conscious” funds. Today, these funds are referred to as sustainable funds or environmental, social, and governance (ESG) funds, and there are many options to pick from among these funds.
By investing in sustainable funds, you will benefit from diversification while also avoiding the need to assess a company’s environmental, social, and governance (ESG) records on your own time and resources. Your fund likely has a staff who is dedicated to working out on this crucial task.
2. Concentrate on diversified funds rather than more volatile and riskier funds.
In sustainable investing, a common mistake is for investors to purchase highly concentrated funds in a single industry to align their investments directly with their principles.
Diversified stock funds, especially those with market-level risk, are more suitable for the backbone of your portfolio. These funds can help you stay focused during up and down markets.
3. Make sure you understand the fund’s performance and sustainability.
What factors should you consider when choosing diversified, sustainable funds to invest in? If you’re new to sustainable investing, it might tempt you to concentrate your efforts on funds that support movements that are important to you.
However, that is not the only thing you will need to consider. If you want to retire comfortably and achieve your long-term objectives, you’ll want to consider the fund’s performance and track record.
4. Keep track of your funds closely.
Finally, ensure that you have a plan to assist you in keeping track of your funds. Too often, investors spend a significant amount of time initially selecting funds that match their requirements. However, they fail to periodically review their investments to see whether or not they are still worthwhile to hold.
I review my fund portfolios monthly. Suppose a fund does not continue to satisfy my standards for performance or sustainability. In that case, I will replace it with a fund with higher returns and better environmental, social, and governance ratings.
Best Sustainable Investments
ESG Funds
ESG funds are mutual funds rated according to environmental, social, and governance considerations. ESG funds are focused on environmental, social, and governance companies with good sustainable and societal influence.
Some environmental, social, and governance (ESG) funds are broadly focused, while others are more narrow. For example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF allows investors to invest in firms that don’t own fossil fuel reserves.
Sustainable Stocks
Individual stocks are often riskier than mutual funds since they do not provide the diversification provided by holding many companies; nevertheless, they provide you with complete control over the company you invest in. For example, if you are enthusiastic about green energy, you can find renewable energy stocks to invest in or invest in companies with a diverse board of directors.
When deciding whether or not to add a stock to your portfolio, you need to analyze more than just its performance. Consider what the company does or produces and the potential consequences for the environment and local populations. Look out for the company’s environmental, social, and governance (ESG) score and employee feedback on a third-party site such as Glassdoor.
Robo-Advisors/Automated Advisors That Provide Sustainable Investments
If carrying out your own investment decisions isn’t your idea of a good time, you don’t have to do it! Robo-advisors use computer algorithms to construct and maintain an investment portfolio that is tailored to your time horizon, risk tolerance, and other personal characteristics. Robo-advisors typically offer a flat fee that is a fraction of the cost of engaging with a traditional financial advisor. More Robo-advisors than ever before now offer automated sustainable investing portfolios at no additional price to investors.
These portfolios are known by various titles, including impact portfolios and socially responsible portfolios. However, regardless of what they are referred to, practically all of them are made up of ESG funds and exchange-traded funds.
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Author’s Note
The takeaway here is that you do not have to be an expert to make more environmentally friendly investments. It’s something that most people can accomplish. For additional help, you can always reach out to an advisor who can help you develop and manage a portfolio of sustainable funds tailored to meet your specific objectives.
Whether you invest on your own or with the help of a financial advisor, with enough research, I believe that you’ll discover that now is an excellent time to be a sustainable investor. There are more funds available to pick from than ever before, and there are so many critical issues that we, as humanity, can address together.
Disclosure: At the time of publishing, the author owned no stakes in any investments above. The comments, opinions, and analyses are for informational purposes only. They should not be regarded as investment advice or recommendations to purchase or sell any security or investment plan. While we believe the information presented here is reliable, we make no guarantee of its accuracy or completeness.
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