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 what it is 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 investors and 95% of millennial investors are willing to fund sustainable organizations.
Moreover, contributing in socially responsible and ESG funds no longer means that investors are sacrificing returns.
In fact, ESG-compliant companies and sustainable assets (like green energy investments) have outperformed their counterparts in the stock market, attributing to the global awareness regarding environmental, social, and governance degradation.
As the pressure builds up on conventional companies to stay relevant and attract investors, things have become trickier for beginning investors.
While initially, it was challenging to find ESG or socially responsible funds, 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.
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 are those that 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.
Why invest in sustainable companies?
Investing in sustainable companies can help to make you feel good about how your money is 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 materials that are environmentally friendly.
Finally, investing in sustainable companies can have a positive financial impact on the portfolio companies in question, ensuring practices are sustainable in the long term. Enter the rise of ESG shareholder activism.
Sustainable investing pros and cons
The biggest pro of sustainable investing is that helps you to make both 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 in that it helps to make sustainable practices sustainable by ensuring a positive return on investment (ROI).
The most commonly known con or disadvantage is that sustainable investing can be expensive. A sustainable company may not provide the same ROI as a non-sustainable company. This con can easily be mitigated by investing in sustainable funds, ESG mutual funds, or ESG funds.
Another sustainable investing con is that sustainable companies may not be successful or sustainable companies may cease to function over time.
This is generally a myth as it largely concerns startups or high-risk ventures. Most companies do not need to be completely 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.
See Related: 10 Best Sustainable Investing Courses
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 out there where you can spend your money for a good reason.
However, consistent financial gains and steady growth are critical components when it comes to sustainability investing. Nevertheless, this opportunity lets you make profits responsibly sleep better at night.
Mainly, all sustainable investment vehicles target a triple or quadruple bottom line approach.
As an investor, it is your job to educate yourself about the consequences involved and conduct thorough research to see how the company performs in each bottom line.
Although it is challenging to gauge the actual performance due to inconsistent sustainability metrics, it is still possible. Go through these simple steps to make a calculated decision while investing sustainably.
See Related: Quotes About Sustainability to Know
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, ESG research and so much more.
Initially, socially responsible investing avoided involvement in certain activities to cater to their investors’ moral and religious beliefs.
Today, 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 socially enter the picture. Apart from excluding investment opportunities based on your personal beliefs, investors are classifying them according to their role in the betterment of the environment and society.
ESG investing, also known as environmental, corporate, and governance, screens companies based on their impacts on the environment, society, and their employees to address sustainability issues.
For example, an ESG investor would screen out companies that have a high carbon footprint, deal in tobacco, drugs, and liquor, or have a dubious governance system.
Nowadays, there are plenty of ESG funds out there that 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 through which investors target companies to make a difference in a specific area.
For impact investments, creating a positive societal impact usually comes as the top priority. These investors actively seek opportunities that will create change for local communities and companies around the world.
Socially responsible investing is an investment strategy that uses sustainable investing concepts which include socially responsible matters such as gender equality with board members, fair corporate governance practices, creating balanced compensation among employees and so much more.
The idea behind SRI is to make profits responsibly while considering the consequences involved.
Socially responsible investors are usually trying to address sustainability issues by excluding investment opportunities based on their personal beliefs or by categorizing investments according to their role in the betterment of the environment and society.
Staying in the loop with all the advancements in the sector can help you choose the most profitable set of 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.
You will have to select your investing strategy, policy, and financial vessel before earning any returns.
Nevertheless, shortlisting the potential companies and stocks can help put things into perspective before you indulge in further steps. Various outlets publish regular lists of ESG and sustainable stocks for investors to stay in the loop.
Start by scrounging through this list and checking the ESG compliance for each company. This will help you devise a proper investment strategy and pick an individual policy for yourself.
Sticking to these lists will also help you steer away from greenwashed companies without any accurate ESG compliance or management of ESG criteria.
You can vet this compliance and criterion by using a rating service like Morningstar to provide expert insight into the quality of a company’s sustainability efforts.
Similarly, if you want 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 going for an ESG fund, take the management expenses into account while assessing the overall financial performance of the investment, and always remember that past performance is not indicative of future performance.
See Related: How to Start Investing in Women
Step 3 – Seek Financial Advice
If you’re a newbie in the sustainability investing sector and don’t want to rely solely on your personal research and personal finance, you can seek financial advice as well.
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 own brokerage account, it is a safe option if you’re looking for consistent risk-adjusted returns.
You will get complete investment management services and auto-investment systems on the plus side if you work with professional advisors to make better investment decisions.
Many mutual funds and exchange-traded funds were created to help individual investors gain access to ESG investment opportunities but sometimes some form of personalized advice can be a good starting point for you to eventually find your own financial products to invest in.
This way, you can enjoy hassle-free returns and increase your wealth at the same time.
See Related: Ways to Start Investing in Vertical Farming
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 are different 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 be taking 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, rather than excluding companies with negative impacts, you’ll be supporting organizations that aim for impact.
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 businesses that are transparent 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 pick a sustainable strategy for yourself, it is time to select the investment vehicles to create your portfolio. You can either include individual stocks or mutual funds into your portfolio.
The ideal way is to create a balance between both financial vehicles to safeguard your investment against risks and ensure steady growth.
If you come across a company you particularly 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.
Most importantly in your investment analysis, make sure 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 in the form of exchange-traded funds) and sustainable funds have their own benefits for sustainable investors.
They help you fill up your portfolio quickly and diversify your holdings. This helps mitigate risks and generate 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.
You can check the ESG ratings for each option before investing your funds.
See Related: Things to Know About Climate Refugee
Final Words
That concludes my sustainability investing tutorial. These sustainable investing strategies are ideal for contributing to a good cause while still 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 yourself, invest in a mutual fund, exchange-traded funds, or hire an advisor for your wealth management, try to stay in the loop at all times.
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 are made with the intention of achieving 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 also 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 at the same time. They believe that businesses should not just focus on making profits but rather should consider how they affect society and the environment as well.
Sustainable investments are a win-win for everyone because they are beneficial to investors, companies, and the environment.
What are the three main approaches to sustainable investing?
Sustainable Investing is made up of three main areas: environmental, social, and governance. Investors who are 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.