Investing is all about making your money work for you. It can also be about using your money to support and reflect your own values, priorities, and principles. This practice is commonly referred to as “sustainable investing” or “socially responsible investing” (SRI).
You may also be familiar with a third term – ESG, which stands for environmental, social, and governance. ESG plays a major role in SRI and is an increasingly important topic in the boardrooms of publicly traded companies. At a high level, sustainable investing is an umbrella concept that combines ESG concerns with socially responsible practices to define the value, worth, or merit of an investment. Sustainable investing is an approach that considers an investment’s ESG factors alongside its potential for financial returns. The goal is to generate profit and create positive, long-term impacts on society, the environment, and corporate behavior. That sounds easy, and worthwhile, but in reality it can be complicated by factors like the actions of third-parties, supply chain disruptions, geopolitical conflicts, and “greenwashing” (misrepresenting practices, vendors, or products as “green” or meeting ESG expectations, when they do not).
Despite these challenges, interest in sustainable investing has grown exponentially during the last two decades and gained more interest than ever during the Covid-19 pandemic, as supply chain disruptions forced people to re-examine sources of goods and services. Demographic changes are also driving interest, as the social concerns and interests of Millennials and Zoomers increasingly drive consumer behavior and consumption patterns. Organizations, many of which were initially resistant to weigh ESG factors as part of their business strategy, are increasingly seeing the value of positioning their company and products as friendly to sustainably minded consumers and investors.
There are numerous approaches to sustainable investing, including choosing individual stocks of companies or sectors, investing in sustainably-oriented mutual funds or EFTs, and making conscious decisions about personal spending choices. Below are some approaches to socially responsible investing to consider for investing in funds or individual stocks:
- ESG Integration: This involves assessing a company’s performance in areas like environmental impact, labor practices, human rights, and corporate governance before making investment decisions.
- Negative Screening: Excluding certain industries or companies involved in activities that conflict with specific values or ethical beliefs.
- Positive Screening: Actively selecting investments based on ESG criteria, supporting companies with strong sustainability practices or innovative solutions.
- Impact Investing: Directly investing in companies, organizations, or funds with the intention of generating measurable social or environmental impact alongside financial returns.
- Thematic Investing: Focusing on specific themes or issues like renewable energy, clean technology, or diversity and inclusion.
Let’s get specific about the impact SRI can make:
Renewable Energy Investments: Over the past decade, investments in renewable energy have seen remarkable growth. Companies focusing on solar, wind, and other renewable sources have not only shown financial viability but have also significantly contributed to reducing carbon emissions.
Impact Investing in Developing Regions: Impact investments in developing regions have made a substantial difference in areas like access to clean water, healthcare, education, and sustainable agriculture. For instance, microfinance initiatives have empowered individuals in underserved communities by providing access to financial services and resources.
ESG Integration and Corporate Change: Companies that have integrated ESG principles into their operations have witnessed positive outcomes. Some have reduced their carbon footprint, improved workplace diversity, enhanced corporate governance, and actively supported social causes, leading to better long-term performance and societal impact.
Community Development Investments: Investments in community development projects, such as affordable housing initiatives, sustainable infrastructure, and revitalization programs, have not only provided financial returns, but also contributed to improving living conditions and fostering economic growth in marginalized areas.
Innovation in Clean Technology: SRI has supported the growth of innovative clean technology companies focused on creating sustainable solutions. From electric vehicles to energy-efficient appliances, these companies have not only thrived in the market, but have also contributed to mitigating environmental challenges.
Sustainable Agriculture and Food Production: Investments in sustainable agriculture practices and ethical food production have shown significant promise. Companies promoting organic farming, reducing food waste, and supporting fair trade have not only generated returns but have also positively impacted food security and environmental conservation.
These success stories highlight how SRI strategies have been instrumental in driving positive change across various sectors while delivering competitive financial returns. They showcase the potential of aligning investment goals with societal and environmental impact, demonstrating that financial success and social responsibility can go hand in hand.
Researching SRI options takes time and effort, and involves a combination of understanding your values, identifying investment goals, and evaluating available opportunities. Mutual funds devoted to sustainable/socially responsible investing do this screening for their investors and have gained significant popularity and traction as investors increasingly recognize the importance of sustainability in mitigating risks, improving corporate performance, and contributing to a more equitable and sustainable future. The approach can effectively align an investor’s financial goals with their broader societal and environmental concerns, allowing them to support causes they believe in while seeking competitive returns. That’s a win-win if there ever was one.
Here are steps to guide your research:
- Define Your Values and Objectives: Start by identifying the social or environmental causes that matter most to you. Determine if you prioritize environmental sustainability, social justice, corporate governance, or other specific issues.
- Educate Yourself on SRI Strategies: Learn about different SRI strategies like ESG integration, impact investing, and thematic investing. Understand how each approach aligns with your values and financial goals.
- Use Screening Tools and Resources: Many online platforms and financial institutions offer screening tools or databases that list SRI funds or companies based on specific criteria. Use these tools to narrow down options that match your values.
- Review Fund and Company Profiles: Once you’ve identified potential SRI options, review fund and/or company profiles, including their ESG ratings, sustainability reports, and impact metrics. Look for transparency and consistency in their commitment to sustainability.
- Consult with Financial Advisors: Seek advice from financial advisors specializing in SRI. They can provide insights into specific investment opportunities, offer guidance tailored to your goals, and help navigate the complexities of SRI investing.
- Assess Performance: Evaluate the financial performance of SRI funds or companies compared to traditional investments. While past performance doesn’t guarantee future results, it’s essential to ensure your investments align with your financial objectives.
- Consider Diversification: Diversify your SRI portfolio across different sectors or industries to spread risk. This helps ensure a balanced approach to investing in alignment with your values.
- Stay Informed and Updated: This is important because sustainability and responsible investing evolve over time. Stay informed about emerging trends, changes in regulations, and advancements in sustainable practices that might impact your investments.
- Review and Monitor: Regularly review your SRI portfolio to ensure it continues to align with your values and financial objectives. Economic, social, or environmental changes can affect the performance and sustainability of investments.
Remember, there isn’t a one-size-fits-all approach to SRI. The “best” way to research SRI options depends on your values, risk tolerance, and financial goals. Taking the time to research thoroughly and staying aligned with your values can lead to a portfolio that generates both returns and positive societal impact.
Financial advisors can offer objective, integrated financial advice, increase your financial knowledge, free up your time, keep your taxes above board, potentially boost your portfolio, and give you insight into your financial future.
At Lafayette Federal, we offer our members the opportunity to grow their wealth through our investment services and retirement solutions. We offer a full array of brokerage services and products to help our members achieve a healthy, sustainable life.