Sustainable investing goes beyond simply the traditional financial goal of earning returns to taking into account both the social and environmental impact of an investment decision. There are multiple approaches available for pursuing such endeavors. Mutual funds, ETFs (exchange-traded funds), and stocks all fall into this category. Establish financial objectives that accurately mirror your principles and convictions, such as reducing carbon emissions or addressing corporate governance matters. Getting clarity around what matters most for you can be helpful in creating the appropriate investment portfolios.
1. Diversification
Diversifying can help reduce your risk of not meeting your financial goals both short- and long-term, as well as take advantage of market trends. Investments in renewable energy may provide an avenue to new opportunities, particularly as countries adopt legislation and policies supporting its use. Furthermore, investing in businesses that prioritize ethical supply chains may lead to more responsible and transparent business practices.
As well as diversifying within asset classes, your portfolio should also include diversifying by geographic region or industry sector to help reduce risks related to economic or political changes within regions while offering more consistent returns over the long run.
2. ESG Factors
Focusing on ESG factors is one way to align an investment portfolio with one’s personal values. Boston-based Trillium Asset Management creates portfolios that exclude companies involved in human rights abuses, environmental concerns, and governance concerns that cause controversy. Their ESG criteria center around “what goes around comes around.” Companies that treat their employees well will in return be treated well themselves.
ESG-focused mutual funds and exchange-traded funds (ETFs) pool resources to invest in companies that meet certain criteria, offering a more diversified approach. Green bonds may also provide funding options that reduce carbon emissions or foster diversity in leadership positions.
3. Positive Screening
An easy way to understand sustainability is as “what goes around comes around.” A cruel medieval king who tortured his peasants might keep some noblemen and commoners under control for some time, but eventually those same individuals would leave, taking their money with them when they decided it wasn’t worth living under his rule any longer.
Companies rated as high performers when it comes to customers, employees, and investors while simultaneously destroying value for society—for instance, dumping waste into local drinking water systems—could have negative Humankind Value and should therefore be excluded from a sustainable portfolio using positive screening techniques.
4. Negative Screening
Negative screening aims to identify companies with inadequate environmental, social, and governance performance relative to their peers. For instance, if a company dumps waste into drinking water supplies that cause people to get sick and incur medical bills as a result of this act of vandalism, then this would negatively impact its Humankind Value; consequently, it would likely not be included in a sustainable investment portfolio.
Some investors use negative screening as a method for aligning their investment portfolio with personal values and sustainability preferences. It provides an efficient means of doing so.
5. Sustainability-Themed Investing
There are various sustainable investment strategies available that can help align your financial goals with your values, such as ESG integration, impact investing, and thematic investments. There’s an old legend about a medieval king who was violent and cruel toward those under his rule, making peasants and nobles afraid of him and eventually leading many people to leave his land altogether. Over time, however, his reign began to falter as people fled his throne in droves.
Sustainability-themed investing entails ranking companies based on their Humankind Values (for instance, supporting diversity or providing transparent and ethical governance). This helps identify companies that may be engaging in harmful practices like dumping toxic sewage into drinking water supplies or engaging in other forms of misconduct that have long-term repercussions for the performance and reputation of the company in question.
6. Investing in Individual Stocks
Individual stocks offer customization and transparency not available through mutual funds, ETFs, or index funds. Plus, they may even be more cost-efficient! Many companies publish sustainability reports to outline their efforts to lower carbon emissions or avoid harmful labor practices. Look for transparency when reviewing these reports, and speak to your advisor about whether investing in these companies could be worthwhile.
Setting up a sustainable investment portfolio that meets your return requirements, risk tolerance, and income needs can be dauntingly complex. An independent financial advisor is often best equipped to assist in this endeavor, and SmartAsset’s free tool can match you up with pre-vetted advisors in your locality—so get going now.
7. Alternative Investments
Investors can use various approaches to create sustainable investment portfolios. This may include ESG integration, thematic investing, and impact investments. However, understanding your goals, risk tolerance, and time horizon are critical elements in creating a truly sustainable portfolio.
Don’t forget to consider the values involved. A company that creates value for investors while at the same time detracting value from society—say, by dumping sewage into our water supply and leading to illness—cannot be sustainable in the long run. Alternative investments tend to have higher minimum investment requirements and fees than traditional securities and are generally less liquid, making it harder to sell an asset if necessary. Furthermore, there may be fewer markets offering verifiable market data and pricing information.
8. Taxes
Taxes should not be the primary driver of investment decisions, but they can have an important role in creating wealth and maintaining it. Understanding how taxes impact your investments can help create an effective strategy to manage, defer, and reduce federal income tax payments.
Sustainable investing entails aligning your financial goals with a positive global impact. Utilizing methods such as ESG integration, impact investing, and thematic investing, you can build an ethically compliant portfolio while still reaping competitive financial returns. Consider sustainability as an unchecked feedback loop; if you treat our planet and its people badly, they will eventually come back at you and stop you from continuing in this behavior.
