Sustainable Investing: How to Make It Work?
Reading Time: 7 minutes If you want to start investing (or looking for new industries), you should learn more about sustainable investing. What is it, what kinds of yields can you expect, and what do you need to do to make it work?
Take a look at our guide on sustainable investing before deciding if this type aligns with your overall goals and ethos.
Table of Contents
What Is Sustainable Investing?
Sustainable investing means taking into account an investment’s impact on the environment and society in general.
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Sustainable investing tries to make money for investors while making the world a better place. These investments often include green energy sources, such as wind and solar-powered solutions.
What Is a Sustainable Investing Strategy?
Any strategy that considers the investment’s impact on the ecosystem, society, and the world, alongside the financial return, can be viewed as a sustainable investing strategy.
What this strategy is will vary for different people. It may mean investing in an ESG fund or aligning the companies’ ethos with the investors’ values.
Why Is Sustainable Investing Important?
Sustainable investing has become more popular as millennials demand investors start concerning themselves with the impact their money is making on the world. It’s their way of demanding change and ensuring a positive result is made on the planet. The point is to ensure that money is used for good, not only for making more money.
The demand for sustainable investing has encouraged companies to embrace sustainability and an eco-friendly business model. Measuring social and environmental impact is now as significant as generating profit.
This means that more and more companies will do more than sell goods and services and become the champions of global issues like climate change and sustainable energy. You can’t help but imagine Elon Musk when you think about sustainable investing, can you?
Sustainable investing performs just as well, if not better than non-ESG funds. There is money to be made with it, so it’s not exclusively about making the planet a better place.
How Does Sustainable Investing Work?
There are essentially two types of sustainable investing:
- socially responsible investing (SRI)
- environmental, social, and governance (ESG) investing
With SRI, investors will decide if the stock or funds match specific criteria, and what they are will depend on the individual investor. Some will refuse to invest in stocks issued by tobacco and alcohol companies, fast food companies, or even technology companies unless they’re making a positive impact on the world.
On the other hand, ESG interesting has a more proactive approach and evaluates the due diligence factors of a company. For example, an oil and gas company is a responsible investment if it is committed to reducing its emissions and giving back to the community.
ESG factors that come into play include:
- environmental factors – like carbon emissions and water use
- social factors – like workplace safety and diversity
- governance factors – board diversity, anti-corruption policies, political contributions, and the like
Sustainable Investing Strategies
While sustainable investing is pretty straightforward, you can adopt several different strategies. They include:
- Negative or exclusionary screening: excluding specific companies, sectors, or practices from your portfolio based on the ESG criteria
- Positive screening: choosing companies and projects based on their positive ESG performance
- Activist investing: buying equity to change how it operates and what it stands for
- Impact investing: investing that aims to solve a specific social or environmental problem
Note that we are still talking about investing here, not charitable donations. While there are investors, especially angel ones, who don’t care too much about the return their sustainable investment will make, that is not usually the case.
Even when making a sustainable investment, you should check a dividend calculator to see how much income will be generated. On the other hand, you can also choose to get involved in sustainable and environmental activities in another way — by supporting non-profits, for example.
What Sustainable Investing Means for You as an Individual
If you are considering making your first sustainable investment, you can use one of the above strategies to find stock or funds that align with your values and philosophies. As more and more companies disclose and openly promote their commitment to sustainability and making a change, you can find all the information to make an educated decision reasonably easily.
However, it would be best if you were mindful that not all companies will follow through, so while they may make promises to promote human rights or fair employment, they may not take action.
There are no differences in the fees you pay when investing in ESG companies versus traditional companies. The investment process is the same, too, so the only difference you need to consider is investment selection.
Selecting Sustainable Investments
If you want to start making ESG-based investments, your first step will be doing research. If you are entirely new to investing, you’ll also need to learn a bit about how the market works.
Many analysts and organizations publish lists of the best ESG stocks annually, which is an excellent place to start. You can manually choose your stocks by browsing brokerages for “ESG” investments, which are always used to identify sustainable investment opportunities.
If unsure, work with an ESG financial advisor who can create a portfolio for you and match your personal investment goals with the right stocks and funds.
Here’s what you also need to keep in mind:
Consider Both the Positives and the Negatives
The simplest way to select your investments is to use negative screening. That way, you can eliminate certain companies from your list and still be left with an extensive portfolio.
This is the simplest and easiest option to execute, as you eliminate what you don’t want instead of selecting what you do like.
Once you have a shorter list, you can consider the causes you are passionate about and select stocks from companies that match them. For example, if your goal is to help fight climate change, you want to invest in companies that reduce their emissions or promote recycling.
Don’t rush this part. If you genuinely want to be a sustainable investor and make a direct impact, you want to ensure the companies you choose are stable and committed enough. You want your focus on companies that can genuinely make a difference.
Choose How Proactive You Want to Be
Some investors want to make a direct impact and work towards a specific goal (like ending world hunger, for example). These investments are the most proactive and are more concerned with making a change than making a profit.
These investments usually come from people or families who have historically had a lot of money. You can, of course, make a difference yourself, but don’t expect it to be as substantial.
Balance Different Approaches
Every investor will tell you that you must balance and diversify your portfolio. In sustainable investing, this means using both negative and positive screening and choosing an impact level carefully.
When you combine all three, you can make the most difference and see the type of financial return you’re looking for. If you are inexperienced, consult a professional who can stack your portfolio to achieve both goals.
You can buy and sell different stocks to maximize profits. You will also pay higher management fees. Passing investing minimizes your trading activity. It banks on the presumption that once you make a good investment, you must let it grow.
In theory, ESG investing is better suited to active investing strategies. It allows you to engage with your investment and select companies working on improving their ESG rating. On the other hand, negative screening works well with passive strategies, as you’ll choose a company based on more than just its ESG index.
In Closing
As more and more investors consider sustainable investing and carefully believe how their money may promote or hinder the causes they care about, sustainable investing will gain even more popularity.
Similarly, companies will need to carefully consider how sustainable they are and what they’re doing to save the planet — or at the very least, not to harm it.
Be mindful of the investments you plan on making, and you can enjoy the feeling of helping the world become a better place with your prudent investments.
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