Putting your money toward a more sustainable planet is a nice ideal, but capitalism and sustainability rarely go hand-in-hand. Is there truly a way to invest that’s good for the environment and for your wallet? Sustainable investing, also known as socially responsible investing, has become increasingly accessible in recent years. It involves investing in companies and funds that have positive environmental, social and governance (ESG) practices, hence the other common term, “ESG investing.” If you’re interested in putting your money to work for both financial returns and positive impact, here’s what you need to know about sustainable investing and how to get started.
What is sustainable investing?
Sustainable investing means investing in companies and funds that aim to generate long-term value by considering ESG factors in their operations and business practices.
-
Environmental: How a company performs in terms of reducing carbon emissions, limiting pollution, using resources efficiently and protecting ecosystems.
-
Social: How a company manages relationships with its employees, suppliers, customers and the communities in which it operates. This includes areas like human rights, labor standards and diversity.
-
Governance: Refers to the leadership and accountability of a company, including executive pay, corruption policies, board independence and transparency.
By factoring in ESG issues, sustainable investing seeks to promote corporate responsibility while also mitigating risks that could impact a company’s performance. For you personally, Charles Schwab explains that choosing ESG funds “does not put investors at any kind of disadvantage when it comes to risk or returns.” This means that if your values are guiding you toward greener investing, your wallet doesn’t have to take a hit.
Different approaches to sustainable investing
There are several approaches to putting your money into companies and funds aligned with your values:
-
ESG Integration: Adding analysis of ESG factors into investment analysis and decisions.
-
Negative/Exclusionary Screening: Excluding certain sectors, industries, or companies from investments that don’t meet ESG criteria, such as tobacco, weapons, or fossil fuels.
-
Positive/Best-in-Class Screening: Investing in sectors, industries, or companies that outperform their peers in ESG practices.
-
Impact Investing: Targeted investments aimed at solving social or environmental problems, like clean energy.
-
Shareholder Advocacy: Using influence as a shareholder to engage companies on ESG issues.
-
Thematic Investing: Investing around a specific theme like clean water or gender equity.
Ways to invest sustainably
If you’re ready to start investing sustainably, here are some steps to take:
-
Choose an investment account that offers options aligned with your values, like a robo-advisor focused on responsible investing.
-
Select sustainable mutual funds or ETFs that screen for ESG criteria or target specific issues. Leading fund families like Parnassus Investments and Calvert Research and Management offer excellent options.
-
Look into green bonds that fund projects with positive environmental or climate benefits.
-
Use your investment dollars to support companies with technologies, products, and services that promote sustainability.
-
Invest in community development institutions like credit unions and community banks that support economically disadvantaged areas.
The bottom line
With sustainable investing, you can put your money to work for both financial growth and social good. Focus on your priorities, research options carefully, and seek guidance to build a values-based portfolio. The ESG investing landscape continues to expand rapidly, making this approach more accessible than ever.
