Over the past several weeks, many of us have been working from home in response to the “social distancing” necessitated by the coronavirus. Nonetheless, we still have opportunities to get outside and enjoy Mother Nature. And now, with the 50th anniversary of Earth Day being celebrated on April 22, it’s important to appreciate the need to protect our environment. Of course, you can do so in many ways – including the way you invest.
Some investors are supporting the environment through “sustainable” investing, which is often called ESG (environmental, social and corporate governance) investing. In general, it refers to investments in businesses whose products and services are considered favorable to the physical environment (such as companies that produce renewable energy or that act to reduce their own carbon footprints) or the social environment (such as firms that follow ethical business practices or pursue important societal goals, such as inclusion and pay equity). ESG investing may also screen out investments in companies that produce products some people find objectionable.
ESG investing has become popular in recent years, and not just with individuals; major institutional investors now pursue sustainability because they think it’s profitable – and plenty of facts bear that out. A growing body of academic research has found a positive relationship between corporate financial performance – that is, a company’s profitability – and ESG criteria.
So, although you might initially be attracted to sustainable investments because they align with your personal values, or because you want to hold companies to higher standards of corporate citizenship, it turns out that you can do well by doing good. Keep in mind, though, that sustainability, like any other criteria, can’t guarantee success or prevent losses.
In any case, be aware that sustainable investing approaches can vary significantly, so you need to determine how a particular sustainable investment, or class of investments, can align with your values and fit into your overall portfolio. Specifically, how will a sustainable investment meet your needs for diversification?
For example, if you desire total control over how your money is invested, you might want to invest in a basket of individual stocks from the companies you wish to support. But if you want to achieve greater diversification, plus receive the benefits of professional management, you might want to invest in sustainable mutual funds. Be aware, though, that even though they may not market themselves as “sustainable,” many more mutual funds do incorporate sustainability criteria into their investment processes. You also might consider exchange-traded funds (ETFs), which own a variety of investments, similar to regular mutual funds, but trade like stocks. ETFs often track particular indexes, so an ETF with a sustainable focus might track an index including companies that have been screened for social responsibility.
Make sure you understand the fundamentals of any sustainable investment you’re considering, as well as whether it can help you work toward your long-term goals. But by “going green” with some of your investments, you can help keep the spirit of Earth Day alive every day of the year.