When it comes to investing, there are a lot of choices: stocks, bonds, real estate — you name it. And then there’s the added challenge of finding investments that align with your personal values. Consequently, an increasing number of investors are taking advantage of opportunities like impact investing and sustainable, responsible, or ethical investing (SRI). These types of investments have grown by leaps and bounds in recent years — so much so that SRI now represents approximately $9 trillion in global capital.
However, for smaller investors who want to explore these options further, the road is not always an easy one. After all, this type of investing has its fair share of challenges.
Here’s how sustainable portfolio management can help.
What is Sustainable Portfolio Management?
Sustainable portfolio management is an investment strategy that seeks to balance environmental, social, and governance (ESG) factors with financial risk, return, and liquidity.
Investors who engage in sustainable portfolio management work with advisors who analyze investment options using screens that incorporate ESG criteria, such as the carbon footprint of a company, the quality of its employment practices, and the strength of its public relation efforts.
Sustainable portfolio management differs from ethical investing in that the latter is generally focused on avoiding certain companies and sectors that fall afoul of one’s personal code of ethics. Sustainable portfolio management, by contrast, allows investors to choose from a wide array of investment options that incorporate criteria that promote responsible business practices.
Why Invest Responsibly?
Investing responsibly has a lot of benefits for both you and society as a whole. Investing in companies that align with your personal values can help you sleep better at night knowing that you’re not a part of damaging industries.
Investing responsibly can also make you money. A 2017 study by the US SIF Foundation found that socially responsible investors outperformed the S&P 500 by an average of 1.5% each year between 2001 and 2016.
How Sustainable Portfolio Management Helps?
There are a number of benefits to investing responsibly, including:
Improved returns – Investing responsibly can actually lead to better returns over time because investors can take advantage of mispriced stocks.
Less risk – Sustainable portfolio management can lead to reduced risk because it allows you to avoid high-risk industries like fossil fuels.
Better sleep at night – Investing responsibly can give you peace of mind knowing that you’re not supporting industries that harm the environment or people.
More money to donate – Investing responsibly can lead to more money to donate to causes you care about.
Tips for Effective Sustainable Investment Management
If you’re interested in investing sustainably, there are a few things you can do to get started.
Educate yourself – Before you dive headfirst into sustainable investing, make sure you understand what it is and what it isn’t.
Choose an investment strategy – Sustainable investing requires you to select an investment strategy that incorporates sustainability metrics into your portfolio.
Tap into your network – When you’re starting out, it’s a good idea to tap into your social networks — they’re a great way to learn about sustainable investing.
Read the financial media – Sustainable investing isn’t widely discussed in the financial media, so you’ll need to seek it out if you want to stay on top of the latest developments.
Stay on top of regulatory changes – Sustainable investing is an evolving field, and regulatory changes can affect how you manage your portfolio.
The Bottom Line
With the growing awareness of environmental and social issues, investing ethically has become more important than ever. In fact, demand for green and responsible investments has almost tripled over the last decade.
Therefore, if you’re looking to invest ethically, consider creating a sustainable investment portfolio so you can narrow down on investment options that are good for society.