Believe it or not, the concept of sustainable investing is not new. Investing for the greater good according to one’s morals and beliefs goes back to the 17th century.
However, the notion has evolved considerably under the ESG environmental, social, and governmental classification. Today, investors who were previously worried about investing their funds to promote their morals and societal well-being explicitly target these opportunities for higher returns.
YES – You can Invest Sustainably AND expect to make money!
Yes, while investors going for ESG, SRI, and sustainable investing build their portfolios based on a quadruple bottom line, financial gains remain an integral part of the concoction. That’s precisely what differentiates sustainable investments from philanthropy- nobody gives out their money for free.
With the inconsistent measurement techniques used to gauge sustainable impacts and the high fees charged by portfolio managers and ETF funds, investors sometimes end up settling for low returns.
If you plan to create an investment portfolio comprising sustainable investment options, you can do so without sacrificing financial returns. Here’s a brief guide on how to invest sustainably while getting market competitive returns on your investment.
Don’t Underestimate The Industry.
Suppose you are familiar with the triple and quadruple bottom line concept. In that case, you probably know that it is an enormous challenge for companies to balance two or three other targets along with consistent financial returns.
Considering the difficulty, most investors choose to steer away from ESG investing options. However, underestimating the industry is a crucial mistake.
That’s because sustainable investing options are the future of the stock market and are already outperforming traditional assets. With the younger generation driven towards taking action against climate change and social injustices, companies that take sustainability seriously are bound to bring consistent returns.
According to global statistics, more than $30 trillion worth of investment assets are operating using sustainable criteria.
Similarly, sustainable investment vessels outperform traditional stocks 63% of the time in the global stock market.
Most importantly, research shows that almost 90% of all millennials are willing to participate in sustainable investment options. As the young generation begins to take over, sustainable investing is speculated to become the only way to create reliable financial returns.
That’s why the first and most essential step for a sustainable investor stepping into the industry is to trust the mission. With governments already working to comply with the Paris Agreement and taking strict measures to erase social inequality, you won’t be sacrificing your returns to invest in a good cause.
While current market trends show exponential growth in sustainable investment opportunities, the concept is yet to become clear and refined. There is no standard measure of calculating sustainable impact globally.
Benefiting from the loophole, some companies tend to greenwash their brand image to attract woke investors. However, that doesn’t mean there is a complete lack of research and information.
Various private ESG compliance systems help grade companies based on their sustainable impact. Besides that, most companies are obliged to submit impact reports to their investors and stockholders to ensure they meet the triple bottom line agreement.
This being the case, investors need to educate themselves about the metrics involved in maintaining sustainability. Not only will this help them get staunch proof about the impact, but it will also ensure steady returns in the future.
Another thing you should be aware of while investing sustainably is the numerous types of sustainable investing strategies. You see, sustainable investing is a broad term that takes multiple values and morals into account.
Based on your approach and preferences, you should dig into the profile of every company before investing. This helps you derive the sustainable impact of your investment in contrast with the financial returns.
For example, if you choose a values-based approach, you’ll be investing in opportunities that exclude unethical means such as tobacco or other drugs. On the other hand, if you go for a value-based approach, you’ll be targeting a specific value you believe in, such as eliminating workplace inequality or ethical treatment of the supply chain.
Selecting the right approach and strategy while following the impact reports and metrics can help you invest flawlessly without compromising financial returns.
Evaluate The Positive and Negative Aspects
As mentioned above, choosing a streamlined approach is vital to ensure secure financial returns while investing sustainably. An easier way to understand this concept is by applying a positive or negative screening process to your investment options.
Let’s say you are a Muslim investor looking to avoid companies that indulge in activities non-compliant with the Shariah law. In this case, you would negatively screen all your existing options to eliminate those associated with commodities such as gambling, tobacco, and alcohol.
If you are targeting good financial returns simultaneously, you should know that negative screening is one of the least expensive sustainable investment approaches. That’s because it is easier for fund managers to gauge the associations of companies rather than measure a single specific impact.
On the other hand, if you believe in a single or multiple causes and want to invest in organizations that work towards impacting that sector, you should go for positive screening.
Instead of including companies that eliminate targeted practices, these funds include companies that work towards impact in various sectors.
However, evaluating impact itself is pretty tricky. That's why you might end up paying a high management fee to invest using this approach.
But, in this case, you’ll be investing in companies working on their ESG metrics. Meaning their stock values might rise in the future. You can combine both strategies and create a balanced portfolio to ensure steady financial returns while promoting sustainable practices.
Make Calculated Decisions
If you want to invest sustainably without sacrificing financial returns, an effortless way is to go for impact investment options.
That’s because these investments directly address a single cause. These include eliminating world hunger or combating climate change. Also, they tend to perform better in the market.
Besides that, out of the $30 trillion worth of sustainable assets globally, more than $502 billion are related to impact investing. This means, impact investing is the ideal investment stream for sustainable investors targeting a specific goal without sacrificing financial returns.
Participate in Both Active and Passive Investment Vessels
Another technique to ensure steady financial returns while investing sustainably is to include both actively and passively managed assets in your portfolio.
While investing actively, you will need to buy and sell stocks frequently based on your market research. This is one of the best ways to maximize your profits in a short period.
But, creating a portfolio comprising altogether of actively managed investments can lower your total earnings. That's because they require high management expenses. Portfolio managers need a higher fee to manage the additional stock trading activity that ultimately eats away your profits.
On the other hand, passive investments help you reduce the trading activity in your portfolio. This ultimately reduces your management expenses.
These investments grow gradually over time, so you don’t need to buy or sell stocks frequently to maximize your revenue.
While the immediate returns are relatively lower, passive investment vessels help diversify your portfolio. Also, they help balance it to help mitigate risks and ensure safe returns.
By balancing your portfolio, you can mitigate risks and reap excellent financial benefits while contributing positively to society.
Sustainable investment opportunities offer market competitive returns and are speculated to rise in value in the future. Still, investors should use their funds carefully to maximize their returns.
The ideal way is to stay in the loop with emerging investment strategies and create a balanced portfolio. If you are having difficulty managing your portfolio yourself, you can reach out to a professional advisor. This way, you don’t lose your money while targeting sustainable investments.
Author Bio: Kyle is the founder of The Impact Investor, a website focused on helping others invest sustainably without sacrificing financial returns. We all want products sourced by sustainable and ethical means, why should investing be any different? Follow my investing journey on my Facebook, YouTube or Twitter accounts.
***Huge thanks to Kyle for creating this amazing piece for us on SKL!