How To Start Investing Sustainably (Without Sacrificing Financial Return)
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 to socially responsible and ESG funds no longer means that investors are sacrificing returns.
In fact, ESG compliant companies and sustainable investment assets have outperformed their counterparts in the stock market, attributing to the global awareness regarding environmental and social 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.
If you plan to start investing sustainably without sacrificing returns, here’s my step-by-step guide to help you out.
Investing Sustainably Without Sacrificing Returns – A Step-By-Step Guide
Anyone who thinks he doesn’t want to plan 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 sustainable 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.
Step 1 – Learn Sustainable Investment Concepts
The first step to enter the sustainable investment sector without compromising financial returns is to educate yourself on the evolving concepts. Initially, SRIs 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 impact investing and ESG investing enter the picture.
Apart from excluding investment opportunities based on your personal beliefs, investors are classifying them according to their role for 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.
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.
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 example, companies working to promote sustainable energy sources or reducing their carbon footprint.
Remember, ESG standards are usually set by third-party companies and might vary according to the country your company belongs to.
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.
Step 2 – Conduct Your Research
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.
Similarly, if you want to avoid the hassle of selecting companies altogether, you can participate in an ESG fund or ETF and let a financial manager manage your portfolio. If you’re going for an ESG fund, take the management expenses into account while assessing the overall financial gains of the investment.
Step 3 – Seek Financial Advice
If you’re a newbie in the sustainable investing sector and don’t want to rely solely on your personal research while handling finances, you can seek financial advice as well. Many robo-advisors specialize in helping you build an ESG portfolio.
These include Sustainfolio, Betterment, Wealthsimple, and OpenInvest. 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 returns.
You will get complete investment management services and auto-investment systems on the plus side if you work with professional advisors. This way, you can enjoy hassle-free returns and increase your wealth at the same time.
Step 4 – Explore Other Strategies
Now comes the most crucial aspect of sustainable investing. 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 including companies that deal in tobacco and drugs, have a high carbon footprint, promote non-renewable energy, or let workplace inequality prevail 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 sustainable investing. In this case, rather than excluding companies with negative impacts, you’ll be supporting organizations that aim for impact.
Your portfolio can focus on companies that work to end world hunger, combat climate change, aid reforestation, or work towards affordable healthcare. However, measuring 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.
Step 6 – Find ESG Investment Vehicles
Once you pick a sustainable investment 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, make sure the company meets the triple bottom line target to ensure consistent financial returns while supporting the cause you believe in.
Additionally, mutual 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 or reforestation, while others offer a generalized ESG approach. You can check the ESG ratings for each option before investing your funds.
Final Words
That concludes my guide for investing sustainably without sacrificing returns. If you are concerned about the issues affecting the environment and society, sustainable investing is ideal for using your money for a good cause.
However, in the case of sustainable investing, positive impact is not the only target. On the contrary, if you conduct proper research, devise the right strategy, and select the correct financial vehicles, you can earn ample returns on your investment.
Whether you construct your portfolio yourself, join a mutual fund, or hire an advisor, try to stay in the loop at all times. This is the easiest way to avoid sacrificing financial returns while investing sustainably.
Note: This article originally appeared at FI by REI.
Category: Stocks
