Sustainable Investing: What You Need to Know
February 23, 2022
More and more consumers are thinking about sustainability in their everyday lives and when it comes to their investments
“Sustainability” as it relates to personal lifestyle can take many forms. For some people, it may be implementing solar energy into their homes or driving electric vehicles. For others, it might be shopping with cloth grocery bags or supporting companies whose business practices align with green efforts.
The latter is where sustainable investing comes into play, an increasingly popular approach for portfolio development. Wondering about the best way to guide your clients to the sustainable investments that are right for them? Here’s your primer on eco-friendly investments.
What is Sustainable Investing?
Sustainable investing is an investing strategy that considers a company’s impact on the environment and society. It’s an investment approach that factors in global positive impact and financial returns.
Sustainable Investing Goes by Other Names
Have you heard of community investing or impact investing? These terms are often used interchangeably to refer to sustainable investing disciplines. Others include:
- Green investing
- Ethical investing
- Socially responsible investing
- Mission-related investing
- Values-based investing
There are Several Ways to Build a Sustainable Portfolio
An inclusionary approach adds only positive-impact investments to a portfolio, while an exclusionary approach omits any companies or investments that have negative environmental or social impacts. Some clients might even wish to blend inclusionary and exclusionary methods into a single portfolio.
What is ESG Investing and How is it Different?
ESG investing is a form of sustainable investing, but unlike the patchwork inclusionary/exclusionary approaches described above, ESG investing is based on three specific criteria to generate financial returns: environmental, social and corporate governance. Examples of ESG issues that are influencing today’s ESG investing trends include:
- Clean technology
- Green building
- Renewable energy
- Water use and conservation
- Climate change
- Community development
- Human rights
- Workplace safety
- Executive compensation
- Corporate political contributions
- Board diversity
- Anti-corruption policies
Sustainable Investment Funds Perform Well
The growth of sustainable investing, and its popularity, can possibly be attributed to its strong market performance even in times of volatility. Sustainable investing spans a diverse range of products and asset classes, allowing for competitive financial returns. Sustainable funds also offer less downside risk than traditional funds, according to a study by the Morgan Stanley Institute for Sustainable Investing. Perhaps the biggest selling point for your clients: There’s no higher cost or fees incurred for them to create an investment portfolio that dovetails with their values or that avoids companies with poor ESG policies.
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