Ready to make a positive impact? What you need to know about sustainable investing
Investing is a fundamental building block for creating wealth and long-term financial security. But you might want to do more with your portfolio than simply boost your net worth.
That's where sustainable investing comes in. Sustainability emphasizes positive outcomes for investors while focusing on efforts that also serve the greater good. Under that broad umbrella, you'll find socially responsible investing, environmental, social, governance (ESG) investing, and impact investing.
Each one has a similar aim, but they don't all work in exactly the same way. Understanding the basics can help you shape a path to sustainable investing that aligns with your needs, goals, and values.
Socially Responsible Investing (SRI)
In a nutshell, socially responsible investing means investing in companies that promote positive social or environmental outcomes. With this approach, you're generally trying to do two things:
- Put your money into companies whose practices reflect their values
- Avoid companies that don't align with your personal values
In investing jargon, these strategies are referred to as "screening" and "exclusion," respectively. But you don't need to use the lingo to understand the end goal.
Socially responsible investing is largely personal since your own values and beliefs inform your investment choices. So, for example, you might choose to invest in companies that actively promote diversity and inclusion while avoiding ones that have a history of discriminatory practices. You're more concerned with what a company does than what kind of profits it generates.
Environmental, Social, and Governance Investing (ESG)
Environmental, social, and governance investing revolves around choosing companies that support ESG principles. Here's what applying an ESG approach might look like:
- Environmental. If you're specifically interested in the environmental factor, you might look for companies that promote the use of green energy, are committed to reducing waste and pollution, or use sustainable materials in their products.
Social. The social factor considers how companies manage relationships with the people they employ, the consumers who use their products, and society as a whole. So again, you might be looking for companies that are inclusive or companies that take a firm stand for workers' rights.
- Governance. Governance refers to how a company is run. If you're focused on good governance, you might look at how companies pay their executives or whether there's a history of mismanagement.
You might choose companies that concentrate on just one area (environmental, social, or governance) or span all three. Instead of screening or excluding based on values, you're looking at how a company's practices might affect its overall success in the long run.
A company that's got a history of environmental infractions, for example, may prove to be less profitable in the future if it's subject to frequent government fines or consumer lawsuits. Essentially, ESG factors can be a risk management tool when choosing investments for your portfolio.
As the name suggests, impact investing considers impacts. But in addition to gauging environmental or social impacts, you're also looking at how you personally can benefit from an investment in a particular company.
Impact investors want to help give back in some way, but they also want to receive something in the form of positive returns. Impact investing uses positive metrics to find investments that meet both criteria.
For example, say that you're interested in real estate investing. You might consider a real estate investment trust (REIT) that invests in property development in underserved areas. You get the benefit of knowing the REIT is helping local communities in need, and you also stand to gain financially through the dividends the REIT pays out.
With impact investing, you're not trying to screen out "bad" companies that don't fit a certain profile. Instead, you're building your portfolio around investments that offer a win-win by benefiting you individually and society as a whole.
Who Is Sustainable Investing Right For?
There's no one-size-fits-all approach to investing, and sustainable investing may not be appropriate for everyone. Generally, you might consider a sustainable strategy if you:
- Would like to use your investment dollars to create positive social or environmental outcomes.
- Value positive impacts alongside positive investment returns.
- Want to back companies that support the same ideas, beliefs or practices that you do.
However, sustainable investing isn't a perfect strategy, and there are some drawbacks that might make it less appealing to some people. For one thing, the desire to be ethical with investing can sometimes mean sacrificing higher returns. And it's possible that you might be overlooking some great investments if you're solely focused on SRI strategies, ESG principles or impact criteria.
It's also important to remember that just because a company purports to be sustainable or socially responsible, it may not be. That's why it's important to do your research to find companies that are able to back up their claims about sustainability.
How to Get Started With Sustainable Investing
If you're interested in sustainable investing strategies, reading this quick guide is a great first step. Once you understand the difference between socially responsible investing, ESG investing and impact investing, you can decide which path (or paths) you'd like to follow.
There are different ways to own sustainable investments. For instance, you might buy individual shares of stock, invest in an SRI mutual fund or choose ESG exchange-traded funds (ETFs). Regardless of which one you choose, it's important to consider your personal risk tolerance, time horizon, and goals for investing.
Talking to a financial advisor can be a big help if you're not sure how to get started with building a sustainable portfolio. An advisor can help you flesh out what your goals are for financial growth and for doing good, which can make it easier to fine-tune your investment choices.