Sustainable Investing: How to Invest in Global Progress
Investing is one of the best ways to save for the future and to grow your nest egg over time.
However, some people have goals beyond simply growing their money.
They want their investments to support more responsible companies that align with their beliefs while avoiding businesses that run contrary to them.
For people who care about how their money might impact the world, sustainable investing is an option.
What is Sustainable Investing?
Sustainable investing is an investing strategy that looks at more than a company’s fundamentals and future potential.
Beyond the potential for growth, sustainable investing looks for businesses that operate sustainably, for example, by minimizing the amount that they pollute or that work to resolve social issues.
Many large companies focus solely on profit, ignoring how their actions can have a negative impact on the wider world.
Sustainable investing lets people invest in companies that take the opposite path, prioritizing having a positive impact on their communities and the planet alongside profit.
Sustainable Investing Strategies
Sustainable investing focuses on three main criteria, environmental, social, and governance. Some also refer to sustainable investing as "ESG" investing because of these focuses.
Environmental investing focuses on businesses that reduce their negative impact on the environment or work to have a positive impact on the environment.
Environmental investing excludes businesses like oil and other fossil fuel firms.
Instead, it focuses on green energy producers like solar energy.
Another example of environmentally conscious companies is those that source their products sustainably and minimize waste.
Companies that look for ecologically friendly suppliers, limit their waste, recycle what they can’t use, and don’t use toxic chemicals all fall into the category of environmental investing.
Some investors want to invest in businesses that focus on social issues that are important to them.
For example, some employers take an active role in promoting gender equity, reducing income and wealth inequality, and promoting safe and healthy working conditions for their employees.
Many businesses also get involved in the communities they are near, encouraging employees to spend time volunteering for local organizations, starting charities, or donating funds to existing charities.
All of these activities are part of running a socially conscious, sustainable business.
Some sustainable investors look at specific aspects of a company’s management before investing.
Specifically, they want to invest in businesses that have clear, open governance structures.
This includes things like regular, independent audits, policies that help the company handle conflicts of interest, and an independent board that works to make sure the company prioritizes the needs of ownership over its management.
Some Examples of Sustainable Investing Funds
Sustainable investing has gained significant popularity recently, so there are many funds that make it easy for people to invest in sustainable companies.
These funds let people buy a share in one security while diversifying their investment across many businesses.
Most of the major mutual fund providers, including Vanguard, Fidelity, and Schwab have mutual funds or ETFs that focus on sustainable firms.
For example, the Vanguard ESG U.S. Stock ETF (ESGV) focuses on American businesses that meet a set of ESG criteria.
It specifically excludes companies in the following industries:
- fossil fuel
- adult entertainment
- nuclear power
It also excludes companies that don’t meet the environmental standards outlined by the United Nations and businesses that don’t meet set diversity requirements.
Another example is the Fidelity Women’s Leadership Fund (FWOMX) which focuses on businesses that prioritize the development and advancement of women in leadership.
Why Sustainable Investing? Is it Right for You?
Sustainable, or ESG, investing is a popular choice for many investors for a few reasons.
Align with your principles and beliefs
One reason that ESG investing is popular is because it lets people invest their money in a way that aligns with their principles.
A pacifist may feel guilty if they invested their money in a weapons company.
Someone who feels strongly about fighting global warming would want to support green energy firms over fossil fuel companies.
Many activists also practice sustainable investing.
By directing their money toward sustainable businesses and out of unsustainable ones, investors may cause the stock price of less sustainable firms to decrease over time, which may encourage those companies to adopt ESG principles.
As with any investment, no one can predict the future and how an investment will perform.
One of the primary reasons to invest in any business is to grow your money.
While focusing on only a small subset of companies may seem like it makes it more difficult to earn a strong return, historically, that has not been the case.
A 2019 study by the International Monetary Fund has found that investments in ESG funds perform similarly to investments in funds that include less sustainable companies.
This means that sustainable investors do not have to give up returns to invest in businesses that align with their beliefs.
Some also investors believe that as ESG investing becomes more popular, sustainable companies may outperform less sustainable ones, giving them even more reason to invest in sustainable businesses.
Risks of Sustainable Investing
Sustainable investing isn’t without its risks.
With all investing, there are risks.
If you invest money in a company that goes bankrupt, you could lose all of your money.
Sustainable companies face many of the same risks and problems that other businesses do, so you could see your investment disappear if the company disappears.
The company could also simply fare poorly, meaning the value of your shares drop, even if the company doesn’t completely fail.
Funds that focus on ESG companies are also relatively new.
While research has shown little difference in performance between ESG and non-ESG investments, there’s no guarantee that this will hold true going forward. Sustainable funds can be volatile and may perform poorly going forward.
Reducing your risk
One of the best ways to reduce your risks when investing is to diversify your portfolio.
If you hold investments in many different companies, the failure of one won’t ruin your portfolio.
You can reduce the risk of investing in sustainable companies by making sustainable investments a portion of your portfolio, investing the other portion of your portfolio in more traditional funds.
This lets you focus some of your money on companies that align with your principles without taking on too much risk.
Sustainable investing is a popular way for people to support businesses that focus on the things they find important.
Understanding how it works, and how it impacts returns, can help you decide whether sustainable investing is right for you.