Depending on your personal values, you may have a moral opposition to certain types of companies. In my experience, this has led some people to shy away from investing altogether, crippled by fear that they may accidentally fund something they deem wrong. This is a basic guide to sustainable investing and how you as an investor can align investments with your values while still growing your personal net worth.
What Is Sustainable Investing?
Sustainable investing is generally measured by considering three different factors: the environment, social impact, and corporate governance. This is also known as ESG. Unlike passive investments in index funds, sustainable investing requires taking a deep dive on the impact of each company.
This can sometimes be done by experienced individual investors but is often done more effectively by investment managers who have the tools to assess each company. Fund companies will often weigh each category and assign a sustainability score to a company, which determines whether a company can be included in a sustainable portfolio. Fund managers have varying standards for sustainability, so it’s important to review selection criteria to see if values align with yours. Working with a qualified financial professional can simplify this and ensure your financial goals are being met.
I strongly urge caution to investors looking to select individual companies on their own because it can lead to disproportionately high risk versus expected return. It is possible to sufficiently diversify while investing sustainably.
The Environment
There are many ways that a company can impact the environment that investors can look to. These include corporate environmental policies, greenhouse gas emissions, waste policies, impact on natural resources, pollution levels, and animal welfare.
In my experience, criteria for portfolios considering the environment have the least variation between fund companies because many investors seeking sustainable funds have priorities that align here.
Social Impact
Social impact is one of the widest varying definitions in sustainability. Basically, social impact looks to the corporation’s impact on society. Funds can have various social priorities, including:
- Aligning investments with certain religious beliefs and practices
- Not using exploitative labor practices like sweat shops
- Missions in line with diversity, equity, and inclusion
- Avoiding companies that contribute to health crises and addiction, such as tobacco and certain pharmaceuticals
If social impact in your investments is a priority, it’s important to reflect on what social impact you want your investments to have and find a fund that invests accordingly.
Corporate Governance
The term corporate governance focuses on the leadership of the company. Some investors may not want to invest in a company that they generally like but has leadership that they don’t agree with. Let’s say you have a company that has top environmental policies and a positive social impact, but the CEO is a complete bully, leading to high turnover and an inconsistent product.
Corporate governance criteria may include the following:
- Transparency of corporate accounting and financials
- High levels of integrity for those in leadership
- Diverse leadership hires
- Accountability to shareholders
- Reduction and disclosure of conflicts of interest
If investing in companies with strong corporate governance is a priority for you, again, it’s important to think through your own priorities and make sure the mission of the fund aligns with yours.
Putting It All Into Practice
As I’ve said, it is possible to align your investments with your values and still grow your net worth. When investing sustainably, it is still important to have a diversified portfolio invested with your goals and risk tolerance in mind.
Let’s say we have a 40-year-old investor whose goal is to retire at age 55 and who has a moderate tolerance for risk. She wants to invest in a sustainable portfolio of investments consistent with her risk tolerance. For this investor, she may have a portfolio of 60% stocks, split between small, mid-sized, and large companies diversified globally and run through the environmental, social, and governance filters. Since she is a moderate investor, we would also want to have a portion of her portfolio in fixed income, or debt investments. That fixed income could be corporate debts of companies we’ve already filtered. It could also include government debts that meet the same criteria the investor set forth.
At the end of the day, if sustainable investing is a priority, working with a qualified financial professional can help simplify this process and align your investments with your values.
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This informational and educational article does not offer or constitute, and should not be relied upon as tax, legal or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6417195.1 (02/24)(exp.02/26)
