Between 2010 and 2019, average annual greenhouse gas emissions reached their highest levels.
It’s time to put our money where our mouth is. Literally.
One way that we can show our support for a greener future is by implementing a sustainable investment strategy with our personal finances. These responsible investment strategies can support projects that align with our values and help create change in a world that desperately needs it.
But how does a sustainable investment strategy work? This guide will go over some of the ways you can introduce sustainable investments into your portfolio.
What Are Sustainable Investment Strategies?
When it comes to investing money, most of us have a couple of main considerations:
Long-term reserves – Many of us start investing as a way to set aside money for when we retire. While the hope is that this money grows over time, our first concern is to have a nest egg ready for when we stop working.
Growing wealth – If our only consideration was putting money aside for a later date, we’d be just as well storing cash under our mattresses. The reason we invest is that it allows our money to grow over time so that we can end up with more than we initially put in.
But after we invest it, our money doesn’t sit idly by waiting for us to access it again. By investing, we’re essentially giving our money to companies that use the money to pursue their business goals. What we may not consider is what those companies do and whether or not it aligns with our values.
This is where sustainable investing comes in. The best sustainable companies to invest in make money and reflect our beliefs and values.
And the best part is, it’s working. Investment in sustainable funds more than doubled in 2020. And, over ten years, returns for these funds outpaced those from more traditional funds, with sustainable funds seeing 6.9% annual growth as compared to 6.3% in traditional funds.
All this is to say that if you’re interested in sustainable investing and sustainable banking, now is the perfect time to get started.
4 Main Approaches to Sustainable Investing
Sustainable investments are growing in popularity and seeing returns that may intrigue you, but you still need to determine how they can work in your personal investment portfolio. Here are four approaches you can take.
1. Adding ESG Investments
When looking at sustainable investment strategies, you may see references to ESG investment strategies. That’s because ESG is a set of criteria used to evaluate different companies or funds that will show how sustainable they truly are. In that regard, ESG and sustainability initiatives go hand in hand. ESG stands for:
Environmental – The first criteria used is that of environmental impact. This gauges how much a company contributes to things like waste, energy consumption, and pollution. Examples of companies with a negative environmental rating may be those in the fossil fuel industry, whereas green energy companies would have a positive rating.
Social – Companies don’t generally act alone. By looking at the relationships a company has, you can see whether their business in practice matches the values they espouse. This factor also measures the company’s relationship with its community. This can take into account issues like community outreach, but also whether the company looks after workers' health and safety (as their workers are members of the larger community).
Governance – This factor is concerned with how the company is run. It considers whether the company uses legal, fair, and transparent means of operation. It can also consider the diversity of a company’s board and whether there are conflicts of interest or political donations that go against the company’s values.
Using these criteria, ESG scores can be calculated for different companies. Simply adding companies with a high ESG score into your existing portfolio is often the first step on the road to a sustainable investing strategy. You can think of it as dipping your toe into the sustainable and responsible investing pool.
However, if you want to really start transforming your portfolio, you’ll likely look to another strategy.
2. Using an Exclusionary Strategy
Another sustainable investing strategy you can use is that of exclusion. With this strategy, you don’t have to search for companies with high ESG scores. Instead, you’ll do an audit of your existing portfolio and expunge any investments you have that are currently having a negative impact (and you’ll avoid this type of company in the future).
This means you’ll need to divest from companies in industries like fossil fuels or tobacco, whose business practices have a negative impact on the environment and society. This may require a thorough examination of your portfolio, especially as some funds may have investments in these companies without you realizing it.
Some funds use exclusionary principles for goals unrelated to sustainability. Examples include:
Moral or ethical reasons – While this may sound similar to the principles of sustainable investing (and there may even be overlap) some funds may take different stances on morality exclusions. Religious-based funds, for example, may exclude tobacco, gambling, firearms, pornography, or other businesses in conflict with their faith. Some of these exclusions may also align with your beliefs, but others may conflict.
Financial exclusions – Another type of exclusion may be based on financial reasons. These funds simply believe certain sectors will not perform well enough to invest in. While financial considerations should always be considered, this style of exclusion can limit investments that may be a good fit for you.
Regulation – The final type of exclusion may be based on regulations where you’re investing. These restrictions are set by the government and you’ll need to follow them regardless of your overall strategy.
While all of these exclusionary strategies may be used by funds that also exclude based on ESG considerations, they don’t mean the same thing. Be sure that you’re aware of the types of exclusions your fund is using and that they align with what you want in your portfolio.
3. Using an Inclusionary Strategy
If exclusion is about taking the bad things out of your portfolio, inclusion is about putting good things into it. This sustainable investment strategy looks to add companies that rate highly in their sector. These companies may not be specifically geared towards green initiatives, but their overall business practices have a positive impact.
The inclusionary strategy is a great way to start taking control of your portfolio and ensuring your money supports businesses you can be proud of.
However, you can take this one step further with an impact investing strategy.
4. Using an Impact Investing Strategy
There are a few key differences between sustainable investing vs impact investing. An impact investing strategy goes beyond simply looking for companies with high ESG scores. Instead, it’s about investing in companies whose missions closely align with your values. Some examples of these types of investments may be:
Renewable energy companies
Sustainable agriculture
Microfinance
The types of companies you invest in will ultimately be decided by what’s important to you. With impact investing, your goal is to make sure your money is directly supporting businesses that are doing work you believe in.
Examples of Sustainable Investments
While you always have the option of investing in a specific company by purchasing stock in that company, not everyone has the time to research individual companies and find investment opportunities that align with their values. What’s more, this investment process can be risky, as it limits your diversification.
That’s why many sustainable investors prefer to look for sustainable funds that invest in multiple companies, all of which fit with their overall goals. One example of such a fund is our Aspiration Redwood Fund. This fund offers many benefits to sustainable investors:
With a minimum investment of only $10, it’s easy for anyone to start investing.
The fund is A-rated as 100% fossil fuel-free by the independent Fossil Free Funds.
The fund’s goal is to meet or beat the S&P 500 total return index so that investors see a return on their investment.
The fund includes a diverse mix of companies that are industry leaders in many fields including:
Information technology
Finance
Industrial
Healthcare
By finding a sustainable investment fund like this to invest in, you can actively support the causes you care about without having to spend an exorbitant amount of time researching different companies and ESG scores.
Aspiration: Helping You Keep Your Money Clean
Sometimes, it can feel like the pursuit of money and the pursuit of a better world are mutually exclusive.
At Aspiration, we don’t believe that.
Our sustainable financial services are designed to help you grow your wealth while also staying true to your values.
We offer checking and savings accounts that never use your deposits to fund fossil fuels, and an investment fund focused on sustainability-focused businesses. Learn more and consider applying today!
Sources:
IPCC. IPCC Press Release. https://www.ipcc.ch/report/ar6/wg3/resources/press/press-release/
CNBC. Money invested in ESG funds more than doubles in a year. https://www.cnbc.com/2021/02/11/sustainable-investment-funds-more-than-doubled-in-2020-.html
The Guardian. Ethical investments are outperforming traditional funds. https://www.theguardian.com/money/2020/jun/13/ethical-investments-are-outperforming-traditional-funds
Advisor Channel. Four Types of ESG Strategies for Investors. https://advisor.visualcapitalist.com/four-esg-strategies-for-investors/
Investopedia. Environmental, Social, and Governance (ESG) Criteria. https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
Morningstar. 4 Steps to Add Sustainable Investing Strategies to Your Portfolio. https://www.morningstar.com/specials/4-steps-to-add-sustainable-investing-strategies-to-your-portfolio