Understanding and getting started in sustainable investing

You’ve probably noticed that sustainable investing is a hot topic among investors these days. But what exactly is it, how do investors do it, and how can you get started if you think it’s right for you? Let’s take a look.

In broad terms, sustainable investing means including environmental, social, and governance (ESG) criteria when analyzing an investment. In sustainable investing analysis, these factors are considered along with more traditional financial criteria like market capitalization, earnings, interest rates, and the like. Some investors may also see sustainable investing as another way to do some good with their investment dollars.

By considering environmental, social, and governance factors, investors evaluate and reward companies with a stronger focus on workplace policies, customer relations, and environmental impacts.

ESG factors can have a real impact on a portfolio’s value and potential performance. That’s why investors who want to get a good return for the level of risk they take on should consider the full set of risks and opportunities a company faces, including ESG issues.

For example, company stocks can lose value when the company is vulnerable in key risk areas such as data security, product quality, fraud, and health and safety. On the flip side, companies that focus on ESG issues may have the opportunity to avoid some kinds of problems or costs that can impact their value. Examples of these kinds of opportunities might include water efficiency, workforce diversity, energy use, supply chain management, and clean tech.

There are many styles or approaches to sustainable investing, so there’s a reasonably good chance that any individual investor can find one that meets their needs and goals. Some popular styles include:

• Screened investing, where an investor tries not to put money into specific business activities such as firearms, tobacco, or fossil fuels.
• Broad ESG fund strategies, which aim to provide investors with well-diversified investments in popular markets, with a focus on companies with favorable ESG practices.
• Thematic ESG strategies that are designed to help investors put their money behind themes such as clean energy, low carbon, and others.
• Impact investing strategies, which are designed to provide measurable positive environmental, social, or governance outcomes along with financial returns — think green bonds, for example.

So how do you implement sustainable investing in your portfolio? A popular way is through sustainable funds—either exchange-traded funds (ETFs) or mutual funds. Sustainable-focused ETFs may help investors put their money behind high-quality companies that manage sustainability risk well, while offering the traditional qualities of an ETF, like diversification and potentially low cost.

There are also sustainable-focused mutual funds, which may invest in the same kinds of companies as sustainable ETFs. Mutual funds are more likely to be actively managed, with some funds aiming to increase the value of their investment by taking a more proactive approach to investing in, and working with, companies that need improvements to their ESG practices.

That’s the short story on sustainable investing—it’s a way for investors to pursue opportunities while mitigating risks and promoting sustainable practices around environmental, social, and governance issues.