Sustainable Investing 101

Apr 22, 2022 3:26:03 PM

Interested in making a positive impact on people and the planet? Sustainable investing is a popular way to do something good for the world, while also looking after your own financial future. Read on for a quick guide to sustainable investing, including what it is, how to get started, and how to ensure your dollars are doing the most possible good.

What Is Sustainable Investing?

Sustainable investing, also known as socially responsible investing, means designing an investment strategy around companies whose mission and actions align with the values of the investor. In this way, the investor is looking to not only achieve a financial return on their investment, but also to make a positive impact on the environment, society at large, local communities, underprivileged people in other parts of the world, and so on. Sustainable investors may also be concerned with the internal workings of companies themselves; for example, by choosing to only invest in businesses that show a quantifiable commitment to gender or racial diversity in the boardroom.

How Does Sustainable Investing Work?

The simple answer is that sustainable investing looks different for every investor. A good place to start is with an ESG fund, which is a special type of mutual fund that chooses companies to invest in based on their Environmental, Social and Governance principles. While taking social and sustainable factors into consideration, ESG funds are otherwise managed just like any other mutual fund – meaning that investors can expect a rate of return that is in line with the fund’s overall risk strategy.

Do You Need a Financial Advisor?

As with any kind of investing, you can develop a sustainable strategy with a financial professional, or invest on your own. The advantages of using a professional are that you can benefit from their expertise in terms of determining where your money is most likely to grow, and where it can do the most good. More and more investors are interested in sustainable investing, so the right financial advisor should be prepared to answer your questions and explain what funds are highly ranked for ESG values. On the other hand, it’s also possible to invest on your own. Online platforms simplify the process and can direct you to sustainable fund suggestions.

What About Investing Locally?

Rather than investing in the stock market, some sustainable investors may choose to put their money back into the local community. If the idea of local sustainable investments sounds appealing, look into community development funds in your area or consider investing in local municipal bonds. Another option for local investments is to get creative and diversify your portfolio: real estate purchases can be put toward affordable housing for low-income tenants, or you might look into investment crowdfunding for small businesses in your area.

How Is Sustainability Ranked?

Detailed information on any major fund is available to potential investors, so you can see how the portfolio or individual company stacks up in terms of carbon emissions, board diversity, green energy revenues vs. revenues based on fossil fuel, and other ESG rating criteria. Some investment opportunities are also ranked as sustainable or socially responsible because of what they don’t invest in: which could mean avoiding companies that deal in fossil fuels, tobacco, gambling, or weapons. While taking all of these ESG metrics into account, a sustainable fund will also make investment decisions based on its particular growth strategy – so be sure to consider your short-term and long-term financial goals while vetting potential funds.

How to Get Started?

If you already have an investing strategy, decide what percentage of non-liquid assets you’re comfortable setting aside specifically for sustainable investing. Then, you can work with your financial advisor or through an independent platform to research appropriate sustainable funds – keeping in mind that if you decide to move large sums of money from one investment to another, it’s a good idea to consult a professional on what the move to a more sustainable investing strategy will mean for your long-term goals. On the other hand, if you’re investing for the first time, a good place to start is by funding your Individual Retirement Account (IRA) or Roth IRA. These accounts give you a tax-efficient place to put your money and kickstart a sustainable investment strategy.

Tags: Investing