Sustainable Investing 101: Your Guide to Getting Started
For modern industry, going green involves focusing on more sustainable and environmentally-friendly initiatives. There’s a big push by many businesses and consumers toward a more healthy and ethical future. For individual investors and larger firms, it begs the question, how can we support and invest in these companies? How can we focus on sustainable investing?
The investing world can be intimidating at times, and specializing in just green and sustainable opportunities narrows the playing field quite a bit. However, there’s value in investing in, honoring and supporting a great cause aligned with your own morals and priorities.
What Is Socially Responsible Investing?
Although it’s a relatively new concept, socially responsible investing (SRI) has always been around. It involves building a portfolio with positive, responsible and sustainable companies. SRI is also growing substantially, with experts predicting it to be a $50 trillion field within the next 20 years.
Also known as environmental, social and governance (ESG) investing, it’s a strategy for supporting companies making the world better and healthier. Many proponents follow a grading scale, issued by third parties, independent companies and research groups that emphasize responsible initiatives. You can determine how much you’re willing to be involved with the three facets:
- Environment: The impact a company has on the environment as a whole, including carbon footprint, toxic chemical and waste handling, manufacturing and beyond.
- Social: The social impact of a company’s operation both internally and externally — such as do they support racial diversity, do they help impoverished communities, do they have LGBTQ+ equality and supportive policies.
- Governance: How the executive team or board drives positive change and makes a difference.
Of course, true sustainability stretches far beyond these concepts. Being an economically, socially and ethically positive operation is worth striving towards in many ways.
Socially responsible investing calls for understanding the impact a company has on one or all of these core factors, then choosing whether or not to invest. The goal is to build a portfolio that includes impactful operations. The trick, however, is finding well-run companies with a positive future, balanced spending and lots of potential. No one wants their portfolio to tank, certainly not because they made some avoidable choices.
Using real estate investing as an anchor, considering how companies invest in local properties and evaluating the impact they have on the community — all of it relates to socially responsible investing. Passive real estate opportunities, putting money into real estate investment trusts (REIT), are also relevant. Almost anything you could invest your money in applies, as long as you’re looking at the social and environmental impact.
Exploring an SRI Example
Let’s say as an individual investor you’re looking to take your sustainable portfolio and include some property and real estate investments. Step one is conducting in-depth research into potential companies to understand sustainability ratings, as well as both social and economic impact.
There are many factors to consider. Does the company own property and rent it out to tenants? Are they multi-family properties or single-residential homes? Are they converting apartments and condos to more traditional housing? All of these questions help determine your investment’s social and economic viability, but also the general impact. For example, a company scooping up homes in a low-income area, gentrifying the neighborhood and hiking prices may be great for the bottom line, but socially it’s bad for the community.
Additionally, homeownership rates today are relatively low, with just 64.2% of Americans owning their homes as of 2018. That means jumping into a company focused entirely on homeownership is not always the way to go.
There are more subtle differences to consider within the real estate and home ownership categories. For instance, city, suburban and rural living offer unique experiences and sustainability considerations. The cost of living, transportation, affordability and other green initiatives — like renewable energy opportunities — can completely transform an investment company’s level of sustainability. Understanding these differences is a big piece of the puzzle when building out your portfolio.
How to Invest More Sustainably: A Guide
Follow these steps to diversify your portfolio with more sustainable investments.
1. Pick a Cause
Sustainability is broad, not unlike the entire ESG spectrum. If you’re focusing on everything, especially as an individual investor, you’re going to have a rough go of it. That’s not to say you should support companies that aren’t responsible, but rather, when you’re building a portfolio you should look into and research the facets most important to you.
For example, choosing a portfolio of economically responsible, or environmentally responsible, projects in everything they do. Maybe you’re more concerned about the social and economic impact those companies are having. Choose what is important for you.
2. Look to the Experts
The term DYOR — do your own research — always applies. You can always find experts to fall back on, especially if you’re unfamiliar with the industries you’re investing in. For example, if you decide to invest in SpaceX, but have no idea what the company is doing behind the scenes, how will you understand their sustainability ratings? Moreover, some information simply will never be accessible.
That’s precisely why ESG proponents look to third parties and consultants for sustainability ratings. There are tools, like Sustainalytics, to allow you to see environmental and social impact. Use them to your advantage.
3. Understand the Difference
Many people fall into the trap of thinking responsible or sustainable investing is different. In fact, there’s nothing different about it. You still invest money, using the same platforms and channels. The only major difference is you’re supporting companies with sustainable operations. It’s entirely up to you how you invest, where you invest and how it applies to your personal morals.
Examples of more sustainable companies include those centered on green energy, water and resources, waste reduction, transportation and other, eco-conscious movements.
4. Make It Happen
The final step, which may seem like the most obvious, is to apply what you’ve learned and make investments in the right opportunities. Don’t lose sight of the goal, but also understand, even though the idea is to invest long-term in many cases, you can always reposition as needed to focus on the right morals, principles and policies.
As with any investment plan, there will be times when you invest in the wrong company and you’ll need to pivot. That’s okay. Just make sure you’re doing the correct research before finances exchange hands.
Supporting sustainable businesses in other ways is another great idea. There are some excellent ways to offer your support, including sharing them on social media, choosing sustainable brands even when prices are higher, changing your shopping defaults, doing additional research and beyond. As an investor, you have a responsibility to support the companies and projects in which you’re financially involved.
How Much of Your Portfolio Do You Want Green?
If you’re considering going green, remember you don’t have to allocate your entire portfolio to sustainable initiatives. You can designate a percentage, or a smaller portion, at first and expand in the future if you want. Before moving on to the next stages, consider how much of your portfolio you want focused on sustainability and what you’d need to make it happen.
Sustainable investing is all about doing the right research and diverting funds to the companies you’ve chosen. Remember, it’s no different than conventional investing, yet has a positive impact on the planet.