Investors these days like to focus on sustainable investing. Once upon a time, sustainable investing meant a strategy that held up against the test of time. These days though, sustainable investing is a focus on environmental, social, and governance (ESG) factors when selecting investments. This is also called socially responsible investing (SRI) and even values-based investing.
How to invest sustainably
Sustainable investing should follow the same path as non-sustainable investing. You should determine what rate of return you need to reach your goal, and then invest your money accordingly. Consider the amount of investment risk you’re willing to take on and come up with a strategy based on that.
Once you’ve determined a risk-return tradeoff, consider the investment path you want to take. Think about the issues that are important to you: the environment, tobacco, human trafficking, and animal welfare are a few I’ve encountered. If you feel the same, your path is likely sustainable investing.
Implementing green investing
There are two overall investment implementation strategies to pursue: passive and active. A passive implementation believes that it is futile and ultimately costly to try to choose the hot stock pickers (or bonds) for your investments. Research shows that it is impossible to know in advance which stock picker will be right. If you keep changing the stock picker you are betting on, the returns from switching will have to be higher because of the increased costs of trading.
Active implementers believe that stock pickers can beat the market or more accurately, the specific sector of that stock picker’s expertise. Some focus on big companies, some small, some domestic, and some international.
Both can be done to accommodate social issues. If you actively choose your own investments, you can look (or ask your financial advisor to look) for stocks that fit your criteria. You may also be able to select from passive funds that pre-screen investments using criteria aligned to your values. The choices increase regularly as more investors gain interest in this type of investing.
True sustainability
While socially responsible or ESG criteria are important, it’s equally important that you stick to your risk/return plan. In the end, your investments need to help you reach a goal, often a very important one. Namely, they need to generate enough savings for you to live off of in retirement.
That means returns and risk are just as important for your investments to be “sustainable,” using the old-school definition. Fortunately, asset allocation is the most important part of this recipe (versus the individual stocks or bonds you pick).
You may find that what you hold dear to support or not support, will require some tweaking to your asset allocation. That’s okay, though. Remember, you need to secure your life vest, first. You can always update your individual investments over time.
