Investors increasingly select sustainable investments that reflect their values and philosophies. Some strategies emphasize ethical considerations (like negative screening or norms-based screening) while others aim at reaching conventional investment objectives such as increasing risk-adjusted returns.
Sustainable investments often include green bonds, community investing and impact or sustainability-themed investments that aim to combat climate change while making our world better places. These investments may even make some financial returns while making an impactful statement about global environmental concerns and making an investment decision that benefits society as a whole.
As sustainable investing gains momentum, investors can turn their attention toward companies and products that support not just their bottom lines but are addressing global issues like climate change. There is no single definition of sustainable investing; to avoid being duped, take time to investigate funds claiming green credentials as much as possible before investing.
As You Sow recently conducted an ethical investor audit on 645 mutual funds and exchange-traded funds (ETFs), and determined that more than half contain fossil fuel exposure – even those with as little as 2 percent exposure! Many funds use public databases like Morningstar to track coal, oil and gas assets with the greatest carbon footprint potential.
Some sustainability funds may fund polluters with their investments while others use engagement strategies to push those companies toward greener practices. No matter their strategy, all funds must be transparent about their methodology so investors can make an informed decision as to whether a sustainable fund fits with them or not.
Many investors now take into account environmental, social and governance (ESG) factors when investing in companies. This consideration includes climate change mitigation and pollution prevention as well as diversity issues such as inclusion and labor relations as well as corporate governance such as management structures and employee compensation plans.
Investors utilize various strategies to integrate ESG factors into investment decisions and portfolio construction, such as positive/best-in-class screening, negative/exclusionary screening, ESG integration, thematic investing and impact investing. These techniques allow investors to align their investments with their values and goals while finding opportunities for long-term financial gains.
Finding out about a company’s ESG performance may not always be clear from its corporate documents or ratings, which is why many investors use ESG funds or an investment screener to find companies that meet their criteria and diversify their investment portfolios with sustainable funds.
Sustainable investments have gained global momentum, providing investors with opportunities to align their portfolios with their values and beliefs. More public companies are providing disclosures that make assessing investment opportunities with sustainability in mind easier.
Some sustainable investors take an ESG integration approach that considers environmental, social and governance criteria in decision-making and portfolio construction across asset classes. This differs from exclusionary approaches like socially responsible investing that screen out certain stocks like tobacco, alcohol and firearms stocks for example.
Funds that specialize in specific sustainable goals such as combatting climate change or gender equality, or that prioritize the triple bottom line can also help. Beware, however, as too many exclusions or narrowing your investments to one area of the market may reduce diversification and materially diminish returns – speak to your advisor about which options would work for you!
If climate change is on your mind, sustainable investing might be the right path. Companies that reduce their environmental impact may experience lower operating costs compared to their peers or reap new market demand from consumers searching for green products and services.
Norman offers several approaches to sustainability-driven investing: positive screening (which selects investments based on what you want); negative screening (which eliminates investments that do not meet your requirements); ESG incorporation (which integrates environmental, community and corporate governance factors into financial analysis and decision-making), as well as impact investing (which prioritizes positive social or environmental outcomes over financial returns).
To select an approach that’s suitable for you, it is important to evaluate your values and priorities, along with any restrictions or constraints placed upon your brokerage account or investment advisor. Once this decision has been made, choose sustainable investments which reflect your moral compass while helping protect our planet.