More and more investors are now seeking sustainable investing opportunities, including ESG investments. Once upon a time, sustainable investing meant a strategy that held up against the test of time. These days, sustainable investing focuses 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. First, determine the rate of return you need to reach your goal and support your money accordingly. Consider the investment risk you’re willing to take, and devise a strategy based on that.
Once you’ve determined a risk-return trade-off, 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 it is futile and ultimately costly to choose the hot stock pickers (or bonds) for your investments. Research shows 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 due to increased trading costs.

Active implementers believe 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 ESG investments, you can look (or ask your financial advisor to look) for stocks that fit your criteria. You may also want to select 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 to 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 and near” to support or not support will require some tweaking to your asset allocation. And that’s okay! Remember, you need to secure your life vest first. You can always update your individual investments over time.

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