The term “sustainable investing” refers to investments that are made with the intention of achieving positive social or environmental impact alongside a financial return. Want to learn more about sustainable investing and how to get started? Read on for a full step-by-step guide.
Did you know that it is easy to start investing sustainably? Although sustainable investments have been around for centuries, they are usually centered around individuals’ personal or religious beliefs.
More commonly, in the capital markets, investors mainly target short-term profits and consistent returns while choosing investment vessels. But, a sudden change in the last few decades has led investors to demand more than financial returns from their investments.
A recent Morgan Stanley survey shows that 85% of all and 95% of millennial investors are willing to fund sustainable organizations. Moreover, contributing to socially responsible ESG funds no longer means investors sacrificing returns.
ESG-compliant companies and sustainable assets (like green energy investments) have outperformed their counterparts in the stock market, which is attributable to the global awareness regarding environmental, social, and governance degradation.
As conventional companies face increasing pressure to stay relevant and attract investors, things have become trickier for beginning investors.
While initially, finding ESG or socially responsible funds was challenging, today, it is challenging to pick out the right sustainable investment opportunities.
What is sustainable investing?
Sustainable investing is a system of choosing stocks and bonds that incorporate sustainable, social, and environmental considerations in their decision-making.
It includes investing in sustainable companies which will not harm the environment or society.
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Why is sustainable investing important
Sustainable investing is important because sustainable companies are those where your money goes towards sustainable practices. This means sustainable companies create long-term positive impacts on the environment, society, and sustainable communities at large.
The sustainable company may focus on renewable energy, sustainable farming, or sustainable construction.
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Why invest in sustainable companies?
Investing in sustainable companies can help make you feel good about your money being spent. Investing in sustainable practices also creates a positive social impact because it supports sustainable communities or provides jobs to people in sustainable communities.
Investing in sustainable companies is commonly known to have a positive environmental impact because, over the long term, sustainability seeks to lower the emission of greenhouse gasses and practice the procurement of environmentally friendly materials.
Finally, investing in sustainable companies can have a positive financial impact on the portfolio companies in question, ensuring sustainable practices in the long term. Enter the rise of ESG shareholder activism.
See Related: Best Sustainable Business Examples to Follow.
Sustainable investing pros and cons
The biggest pro of sustainable investing is that it helps you make emotional and logical investments. Emotional investments are those where your investment has emotional or moral reasoning behind it.
Logical investments are those where your investments are made for the financial benefits they bring. Sustainable investing is beneficial because it helps sustain sustainable practices by ensuring a positive return on investment (ROI).
The most common con or disadvantage is that sustainable investing can be expensive. A sustainable company may not provide the same ROI as a non-sustainable company. Investing in sustainable funds, such as ESG mutual funds or ESG funds, can easily mitigate this con.
Another sustainable investing con is that sustainable companies may not be successful or cease to function over time. This is generally a myth as it largely concerns startups or high-risk ventures. Most companies need not be groundbreaking or new to an industry to meet ethical investing, green investing, or ESG factors.
If you plan to start investing in sustainable companies and don’t want to sacrifice financial return, here’s my step-by-step guide to help you out.
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How to Get Started with Sustainable Investing – A Step-By-Step Guide
Anyone who thinks you should only focus on investing strategies based on financial returns is chasing the wrong cause. There are many charitable organizations where you can spend your money for a good reason.
However, consistent financial gains and steady growth are critical to sustainability investing. Nevertheless, this opportunity lets you make profits responsibly and sleep better at night.
All sustainable investment vehicles mainly target a triple- or quadruple-bottom-line approach. As an investor, you must educate yourself about the consequences and conduct thorough research to see how the company performs in each bottom-line.
Although it is challenging to gauge actual performance due to inconsistent sustainability metrics, it is still possible. Follow these simple steps to make a calculated decision while investing sustainably.
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Step 1 – Learn Sustainable Investment Concepts
The first step to entering the sustainable investment sector is to educate yourself on the many evolving concepts, such as sustainable solutions, governance factors, ESG integration, and ESG research.
Initially, socially responsible investing avoided involvement in certain activities to cater to their investors’ moral and religious beliefs. The younger generation is becoming more aware of the negative human implications on the environment and societal injustices.
That’s where concepts like ESG investing, impact investing, and society enter. Apart from excluding investment opportunities based on personal beliefs, investors classify them according to their role in improving the environment and society.
ESG investing, also known as environmental, corporate, and governance, screens companies based on their impacts on the environment, society, and employees to address sustainability issues.
For example, an ESG investor would screen out companies with a high carbon footprint, deal in tobacco, drugs, and liquor, or have a dubious governance system.
Nowadays, plenty of ESG funds filter out these types of companies, so you remain only invested in companies that meet ESG factors. Remember, ESG standards are usually set by third-party companies and might vary according to the country your company belongs to.
On the other hand, impact investing is a value-based approach in which investors target companies that will make a difference in a specific area.
For impact investments, creating a positive societal impact is usually the top priority. These investors actively seek opportunities that will create change for local communities and companies worldwide.
Socially responsible investing is an investment strategy that uses sustainable investing concepts. These include socially responsible matters such as gender equality with board members, fair corporate governance practices, creating balanced compensation among employees, and more.
The idea behind SRI is to make profits responsibly while considering the consequences involved. Socially responsible investors usually try to address sustainability issues by excluding investment opportunities based on their personal beliefs or by categorizing investments according to their role in improving the environment and society.
Staying informed about all the advancements in the sector can help you choose the most profitable investments from the ESG or sustainable options available.
See Related: Top Social Sustainability Examples
Step 2 – Conduct Your Research and Evaluate Your Risk Tolerance
Once you are familiar with all the existing concepts regarding sustainable investments, it is time to choose the right set of investments for yourself.
Before earning any returns, you must select your investing strategy, policy, and financial vessel. Nevertheless, shortlisting the potential companies and stocks can help put things into perspective before you take further steps. Various outlets publish regular lists of ESG and sustainable stocks to keep investors in the loop.
Start by scrounging through this list and checking each company’s ESG compliance. This will help you devise a proper investment strategy and pick an individual policy. Sticking to these lists will also help you avoid greenwashed companies without accurate ESG compliance or management of ESG criteria.
You can vet this compliance and criterion using a rating service like Morningstar to provide expert insight into the quality of a company’s sustainability efforts.
Similarly, to avoid the hassle of selecting companies altogether, you can participate in ESG funds, mutual funds, or ETFs and let a financial manager manage your portfolio and asset classes.
- Check out our favorite ESG funds to invest in.
- Or, check out our favorite mutual funds to invest in.
If you’re choosing an ESG fund, consider the management expenses when assessing the investment’s overall financial performance. Always remember that past performance is not indicative of future performance.
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Step 3 – Seek Financial Advice
If you’re a newbie in the sustainability investing sector and don’t want to rely solely on your research and personal finance, you can also seek financial advice. Many ESG robo-advisors specialize in helping you build an ESG portfolio.
These include Betterment, Wealthsimple, M1 Finance, and SoFi Invest. Although seeking professional advice might cost you more in the long run than operating your brokerage account, it is a safe option if you want consistent risk-adjusted returns.
If you work with professional advisors to make better investment decisions, you will receive complete investment management services and auto-investment systems.
Many mutual and exchange-traded funds were created to help individual investors access ESG investment opportunities. Still, sometimes, some form of personalized advice can be a good starting point for you to find your financial products to invest in eventually.
This way, you can enjoy hassle-free returns and increase your wealth simultaneously.
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Step 4 – Explore Other Sustainable Investing Strategies
Now comes the most crucial aspect of investing sustainably. As I mentioned, there are a plethora of strategies you can take up while targeting responsible returns.
The most common term you’ll come across while looking for sustainable investments is ESG. This criterion limits the number of the company’s profits generated from irresponsible practices.
Although the criteria differ according to your company’s organization, it lets you minimize the negative impacts on the environment and society. This approach is called negative screening.
Another similar strategy is socially responsible investing. In this case, you’ll take a negative screening approach to screening out companies whose practices don’t align with your moral or religious values and beliefs.
For example, you can avoid tobacco companies, unethical drug companies, businesses with a high carbon footprint, or promote non-renewable energy, or companies’ workplace inequality prevails in their system.
This way, your portfolio will be built on the values and morals that are important to you. On the other hand, impact investing offers a positive screening approach to investing compared to traditional funds. In this case, you’ll support organizations that aim for impact rather than excluding companies with negative impacts.
Individual investors can focus on companies that work to end world hunger, combat climate change, aid reforestation, or work towards affordable healthcare.
However, measuring positive societal impact is a crucial aspect of this strategy. The impact is not a tangible commodity; therefore, it cannot be measured precisely.
That’s why it is crucial to associate with transparent businesses about their practices and submit regular impact reports to their stockholders.
See Related: History of Impact Investing
Step 6 – Find ESG Investment Vehicles
Once you have chosen a sustainable strategy, you can create a portfolio by selecting investment vehicles. You can include individual stocks or mutual funds.
The ideal way is to create a balance between both financial vehicles to safeguard your investment against risks and ensure steady growth. If you encounter a company you admire, you should buy its stocks to invest in the cause.
Before indulging in the process, go through their impact reports and look for data on how they handle issues like carbon emissions and gender inequality among employees.
In your investment analysis, ensure the company meets the triple bottom line target (or, even better, the quadruple bottom line) to ensure consistent financial performance while supporting the cause you believe in.
Additionally, mutual funds, ESG funds (most commonly known as exchange-traded funds), and sustainable funds have their benefits for sustainable investors.
They help you quickly build up your portfolio and diversify your holdings, which mitigates risks and generates consistent returns.
You can find various funds centered on a single cause, such as green energy, corporate governance, reforestation, or corporate responsibility, while others offer a generalized ESG approach. Before investing your funds, you can check the ESG ratings for each option.
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Final Words
That concludes my sustainability investing tutorial. These sustainable investing strategies are ideal for contributing to a good cause while achieving excellent returns. Who wouldn’t like that? However, in the case of his investment strategy, a positive impact is not the only target.
On the contrary, if you conduct proper research, devise the right strategy, select the correct financial vehicles, and think about portfolio construction, you can earn ample returns on your investment and manage risk along the way.
Whether you construct your portfolio, invest in mutual or exchange-traded funds, or hire an advisor for your wealth management, always stay in the loop.
This is the easiest way to avoid underperforming the overall returns of other potential investments while also investing sustainably.
See Related: Does Sustainable Investing Lead to Lower Returns?
Frequently Asked Questions (FAQs)
What is sustainable investing?
Sustainable investing refers to investments that achieve positive social or environmental impact alongside a financial return. Investing in sustainable companies ensures that you’re doing your part to uphold sustainable development while earning a sustainable return on your investment.
How important is sustainable investing?
Sustainable investors want their money to have a positive impact on the world while being financially sound. They believe that businesses should not just focus on making profits but also consider how they affect society and the environment.
Sustainable investments are a win-win for everyone because they benefit investors, companies, and the environment.
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What are the three main approaches to sustainable investing?
Sustainable Investing comprises three main areas: environmental, social, and governance. Investors interested in creating or maintaining a positive impact seek out particular investment opportunities that meet the ESG factors.
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This article does not constitute investment advice and is for informational purposes only.
