Have you heard of sustainable investing or ESG investing and not sure where to start? You’re in the right place.
Key Takeaways:
Sustainable Investing Aligns Money with Values: Sustainable investing allows you to support companies and projects that make a positive impact on the environment and society, ensuring your investments contribute to a better world.
Diverse Approaches to Fit Your Goals: There are various approaches to sustainable investing, from exclusionary screening to impact investing, each offering different ways to align your financial decisions with your personal values and goals.
Sustainable Investing Encourages Positive Change: By directing capital towards responsible businesses, sustainable investing helps promote better corporate practices and funds critical projects that support the planet’s future.
How to take action today:
Define Your Values and Financial Goals: Reflect on what matters most to you—whether it’s environmental sustainability, social justice, or ethical governance—and how these values align with your financial goals. This will help guide your investment decisions.
Start Small with Sustainable Investments: Begin by allocating a portion of your portfolio to sustainable investment options that align with your values. Research funds or companies that meet your criteria, and gradually increase your investment as you gain confidence and experience.
What is Sustainable Investing?
Sustainable investing simply means choosing investments that not only aim for financial returns but also contribute positively to environmental, social, and governance factors (ESG). This helps ensure that investments focus not only on the short-term financial profits of a company, but also consider the impact the company has on people and the planet.
What does ESG stand for and is it important?
ESG stands for Environmental, Social, and Governance and provides three ways to evaluate a company’s impact beyond just its financial performance. For example:
Environmental metrics could include things like a company’s carbon emissions, water use, or land management practices
Social factors look at how it treats people, including employees, customers, and communities
Governance focuses on the company’s leadership, ethics, and transparency
Together, these ESG elements are factors investors use to assess the sustainability of a company or their investments.
5 Approaches to Sustainable Investing
Whether your focus is on a single area, such as a company’s carbon emissions, or on multiple aspects, like its performance across all environmental and social metrics, these approaches provide a framework to help you evaluate the companies and funds that align with your values.
1. Negative/Exclusionary Screening
Negative screening excludes companies or industries that do not align with certain ESG standards. For example, many investors choose to avoid sectors like tobacco, fossil fuels, or weapons manufacturing.
While this method is effective in steering clear of harmful sectors, it can limit the diversity of your investment portfolio. However, for those committed to certain values, negative screening offers a clear way to ensure their investments align with their values.
2. Positive/Best-in-Class Screening
Positive screening, or best-in-class screening, flips the script by actively selecting companies that excel in ESG performance compared to their peers. This approach rewards companies that are leaders in sustainability, promoting better corporate practices across industries.
This method allows investors to support companies making significant strides in ESG areas. However, identifying truly best-in-class companies requires robust research and can be challenging due to varying standards and reporting practices.
3. ESG Integration
ESG integration is a more nuanced approach than Negative or Positive screening as it goes beyond a simple “pass/fail” decision criteria and evaluates both the company’s expected financial performance and sustainability metrics together.
For example, in addition to the financial returns, the investor will consider environmental risks, such as potential regulatory penalties for carbon emissions or stranded assets as the world shifts to greener energy. This approach offers a more comprehensive way to manage risk and potentially enhance returns over the long term.
However, ESG factors can be used in two ways: the risk of the planet on the company, and the risk of the company on the planet. If you are trying to align your investing with your values, many common ESG funds can be misleading as they are often more focused on whether a company’s profits are at risk due to changing conditions like climate change, rather than how the company is contributing to or helping reduce climate change.
4. Impact Investing
Impact investing goes a step further by focusing on investments designed to generate specific positive environmental or social impacts, alongside financial returns. Whether it's funding renewable energy projects or supporting social enterprises, impact investing aims to make a tangible difference.
This approach can be great for investors who want to see their money directly contribute to solutions for global challenges. While it may involve trade-offs in financial returns, the direct impact can be highly rewarding for those passionate about particular causes.
5. Shareholder Advocacy and Engagement
If you invest, you own part of a company and have a right to influence the direction of that company. This approach uses your ownership stake in a company to influence its behavior and push for better ESG practices. This can include voting on shareholder resolutions, engaging in dialogue with management, or even filing proposals.
However, it can be hard for investors to influence change unless they own a large amount of the company.
Why Sustainable Investing is Important
Sustainable investing is more than just a financial strategy; it’s a way to ensure that your money supports companies and projects that are making a positive impact on the world. By choosing to invest in companies that prioritize ESG factors, you’re directing your money toward businesses that are committed to doing the right thing—whether that’s reducing their carbon footprint, promoting fair labor practices, or enhancing corporate transparency.
This approach not only encourages companies to adopt more sustainable practices, but it also helps to fund projects that are crucial for the planet’s future, such as renewable energy, sustainable agriculture, and clean water initiatives.
When you invest sustainably, you’re playing a part in driving the global transition toward a more equitable and environmentally responsible economy.
How to Get Started with Sustainable Investing: 3 Simple Steps
By following these three simple steps, you can begin aligning your investments with your values and contribute to a better world.
1. Define Your Values and Goals
The first step is to determine what matters most to you. Are you passionate about combating climate change, supporting gender equality, or promoting ethical governance? Next, consider your financial goals—whether you’re investing for the long term, seeking stable income, or looking for growth opportunities. Your values and financial goals will guide you in selecting the right investments.
2. Research Sustainable Investment Options
Once you’ve defined your values and goals, the next step is to research the available sustainable investment options that align with your values and financial goals. Many investment platforms, advisors, or websites offer tools to help find sustainable investments, like FossilFreeFunds.org.
For example, Aspiration’s Redwood fund is a more holistic ESG-focused fund that invests in companies that have above-average performance across a wide variety of environmental and social metrics. The Redwood fund excludes fossil fuel and firearm companies along with most companies in the alcohol, tobacco, defense, nuclear, GMO (Genetically Modified Organisms), water bottles, gambling and pornography industries.
3. Start Small and Monitor Your Investments
You don’t have to dive in all at once. Start small by allocating a portion of your portfolio to sustainable investments and gradually increase it as you become more comfortable. It’s also important to monitor your investments regularly to ensure they continue to align with your values and perform well financially.
If you are mostly interested in climate-friendly investing, check out our complete guide here.