Today, more and more people want their investment dollars to do some good in the world. Should you, too, consider sustainable investing? And if you do, must you accept weaker returns from your investments?
To answer these questions, you may want to have some background on sustainable investing. Sustainable investing is generally understood to include any investment process that uses environmental, social, and governance (ESG) criteria to evaluate investment merit or to assess the societal or environmental impact of investments. Below are four ways to differentiate sustainable investing funds.
- ESG Aware—ESG criteria is one of many factors considered when selecting the individual stocks and bonds that make up a fund’s portfolio. In these strategies, investments that are poor performers on ESG criteria may still make it into the portfolio if other criteria, such as profitability or growth prospects, outweigh the risks associated with the poor ESG scores.
- Impact Investing—As the name suggests, impact funds are those that seek to deliver societal or environmental impact as a primary objective alongside financial return. So, for example, an impact fund may focus on investing in companies making measurable progress in key areas of impact, such as those outlined by the UN’s Sustainable Development Goals, which include clean water or reduced inequality.
- ESG Integration—These funds fully integrate ESG criteria into the investment selection process, favoring companies that are addressing the sustainability challenges facing their businesses and industries and/or avoiding companies that are not. There are many ways ESG integration can be implemented, from investing only in ESG best-in-class companies to companies that are making the greatest improvements in their ESG profiles.
- Thematic Investing—Strategies in this category invest in companies involved in green industries, such as water, renewable energy and environmental services. These funds are more niche because of the thematic focus and typically have narrowly defined investment guidelines, which can reduce diversification and may not fit neatly into a traditional asset allocation framework.
Given the above categories, you can probably find many investment options that align with your own values and interests. But what about the performance? Should you be prepared to accept lower returns in exchange for exercising your preference?
Studies have shown that sustainable investments can perform just as well as their peers in the general investment arena. Of course, each investment is different, and when you invest, you can expect that prices will fluctuate, and you could lose some of the value of your investment. But this is true of all investments, regardless of whether they are considered sustainable.
Furthermore, you don’t have to operate in the dark about how well sustainable investments are doing, as several indexes track the performance of securities considered by the index provider to be sustainable. A financial professional can help you evaluate these types of investments to determine which ones might be suitable for your needs and personal situation.
So, there you have it—you can do well by doing good. Whether you choose to follow a sustainable investment approach or not, it’s important to note that if you do, you won’t be putting a roadblock on the path toward your financial goals.