It is almost impossible to avoid hearing about ethical investing these days. Investors are increasingly concerned about how their investments might impact the world around them.
Ethical or responsible investing refers to strategies that reduce exposure to company activities that may be considered harmful to one or more universal principles or values, such as environmental protection, fair labor practices, animal rights, or general social standards. You can tailor your portfolio to reflect your principles by identifying your values and beliefs.
Here is some advice on building a sustainable portfolio for ethical investors.
Ethical Investors: Creating Sustainable Investments
Sustainable investing builds a portfolio to create social and environmental impact alongside financial returns. Know that your investments are being treated responsibly, and leave a positive mark on the world by protecting environmental resources and supporting corporations working towards a greener future.
There’s no better way to ensure that your investments are being used for good than to consider companies’ ethical stances before you make any purchases. After all, what good is building a portfolio without a conscience? There are different approaches to sustainable investing.
Exclusion Investing
If you’re new to sustainable investing, you might want to start with exclusion: removing certain industries from your portfolio entirely. You can do this by investing in a negatively screened portfolio, which means you’re actively avoiding certain companies because they don’t meet your standards. Exclusion works best when you have a specific ethical concern not addressed by a positive screened fund. Some examples are weapons, fossil fuels, tobacco, and private prisons.
Best-in-Class investing
Sustainable investing in best-in-class is when you have a company with better quality than the average company. Brands that have the best-in-class in the industry don’t necessarily need to be socially responsible. You may invest in a company that pollutes the environment because its ESG score is the best in its industry.
Active Ownership Investing
An important part of sustainable investing is ensuring you’re an engaged shareholder. This means you need to engage with the companies in your portfolio to encourage them to do more good.
You can do this with shareholder letters, meeting with company management, and supporting shareholder resolutions. A long-term investment horizon will help you have the patience needed to be an influential shareholder.
Impact Investing
You can also invest in companies with a social or environmental mission, known as impact investing. This means you invest in ventures that solve real problems and create better outcomes for people and the planet. Look for companies with a low carbon footprint, use renewable energy sources, recycle materials, or have products that benefit the public good (e.g., medical technology that helps people live healthier lives). Additionally, you can find sustainable companies by investing in industries like agriculture and tourism, which have a more negligible environmental impact.
Thematic Investing
Thematic investing is an approach to portfolio construction that focuses on the underlying investment theme. Thematic investing seeks to find investments that align with certain themes, such as growth, value, and income. Investors can invest in companies whose products or services align with their personal financial goals by focusing on thematic investing.
Thematic investments are different from traditional security selection. In traditional security selection, investors select individual securities based on risk/reward profiles. Thematic investors choose a theme (such as growth) and then identify investments that match that theme. Thematic investors can allocate their money across various securities within their chosen theme, providing diversification benefits while supporting their personal financial goals.
Thematic investing has traditionally been used by active fund managers who use screeners or quantitative models to identify stocks that fit their criteria for choosing securities in a particular investment style. However, many ethical investors are now turning to thematic investing as an alternative way to ensure their portfolios are positioned for growth.
ESG Integration
ESG, or environmental, social, and governance, is an acronym that has gained momentum in recent years. It refers to the three main elements of corporate sustainability: environmental, social, and governance.
ESG metrics are important because they help you understand your investments’ impact on the world and how they fit into your overall investment goals. By incorporating ESG metrics into your investment decisions, you can make more informed decisions about allocating your money to achieve the best possible returns while minimizing risk.
ESG metrics can help you build a sustainable portfolio by focusing on the following:
- Environmental sustainability
Environmental sustainability focuses on the long-term protection of our natural resources and ecosystems. Sustainable investing is not just about avoiding polluting companies. It’s also about ensuring that your investments do their part to protect the environment and the natural resources they use. Companies with a longer-term view of business and investing in practices that are good for society and their bottom line are more likely to be sustainable over the long term.
- Social Responsibility
An ethical framework for corporate decision-making considers human rights, labor standards, community relations, and employee benefits. Social sustainability reflects a company’s efforts to contribute to society through responsible business practices. Investors look for companies with policies that support their employees’ well-being, the communities they serve, and the environment. By understanding how their investment decisions impact these areas, ethical investors can make conscious choices about where their money goes.
- Governance
As a result of ESG governance, companies ensure accuracy and transparency in accounting methods, pursue integrity and diversity in selecting their leaders and carry out shareholder reporting.
In addition to ensuring that board members and executives don’t have conflicts of interest, they may want assurances that companies refrain from using political contributions to gain preferential treatment or that they are not undertaking illegal activities.
Summing up
Sustainable investing is a powerful way to earn financial returns while creating positive social and environmental impacts. It is an approach to investing that focuses on socially responsible companies with strong environmental and social policies. There are multiple sustainable investing strategies, including exclusion, best-in-class, active ownership, thematic investing, impact investing, and ESG integration. Sustainable investing provides long-term, sustainable returns for investors who want to invest in a way that is socially and environmentally conscious.
