How Does Sustainable Investing Fit Into Your Financial Management Plan?

Regardless of whether you’re new to investing or you’ve built up a considerable investment portfolio through vehicles like your 401(k), you may be curious about sustainable investing, a strategy that has gained significant attention in the last few years. More than that, you may be questioning whether sustainable investing is right for you and, if it is, how to get started. So, let’s dig in.

What is sustainable investing?

Normally, when people consider investing in a company or something like a mutual fund, they focus on its historical, current and potential financial performance because they want their money to grow so they can reach their own financial goals. With sustainable investing, you consider the company or fund’s impact on society in addition to its financial performance.

This investment strategy serves two purposes. First, it allows you to invest your money in assets that more closely align with your values, and second, it focuses your attention on things that could affect the company’s financial performance down the line. You may have also heard the terms socially responsible investing and impact investing. They are interchangeable with sustainable investing.

Here are the most popular approaches to sustainable investing:

• Negative screening: You decide which industries or particular companies you want to avoid investing in because of their negative impact on society. For example, someone highly health-focused can consciously avoid investing in tobacco businesses. Likewise, someone concerned about climate change can intentionally choose not to invest in companies involved in fossil fuels.
• Thematic screening: You don’t just avoid the negatives; you intentionally put your money into companies and industries that make a positive impact on issues that are important to you. So the eco-conscious investor above could choose to invest in companies involved in renewable energies. That person’s strategy would be called green investing, a subset of sustainable investing.
• ESG screening: You look at the whole picture by assessing a company’s impact in three key areas:
  • The environment, covering things like climate change, national resource erosion, pollution and waste
  • Social issues, such as product liability, labor relations, human rights and diversity, equity, and inclusion (DEI)
  • Governance of things like corporate behavior and executive compensation

Why choose sustainable investing?

In a recent Morgan Stanley survey, 57% of global investors indicated that their interest in sustainable investing has increased in the last two years. So much so that more than half (54%) are planning to boost the amount of money they put into sustainable investments in the next year. Key reasons for the growing interest in sustainable investing include:

• Value alignment: An investor like you doesn’t have to sacrifice your values or feel guilty that you’re making money off of something that goes against your principles or is causing harm to society in some way.
• Good performance: Generally speaking, sustainable investments have a positive track record of financial performance. During some periods, their performance actually surpasses that of traditional investments. Between March 2020 and March 2021, S&P Global found that 19 out of 26 ESG exchange-traded funds (EFTs) and mutual funds increased in value anywhere from 27.3% to 55% compared to 27.1% for the S&P 500 index. Morgan Stanley indicates that in 2023, sustainable funds enjoyed a median return of 12.6% versus 8.6% for their traditional counterparts. Such financial performance was cited by 52% of the above-mentioned survey’s participants as the reason for their growing interest in sustainable investments.
• Long-term view: Companies that take an active interest in how their actions and business activities are or will impact society will most likely be better prepared financially and otherwise to survive and thrive going forward.

How to find sustainable investments?

There are several ways to find sustainable investments:

• Assess individual companies: Before buying stock in a company, you can research its record of societal impact by following market and business news reports and reading the company’s corporate sustainability report, typically located on its website.
• Engage a robo-advisor: In addition to creating a customized portfolio based on your financial goals and risk tolerance, many robo-advisors allow you to factor ESG into the algorithm that provides investment recommendations to you.
• Go to a brokerage firm: Most of these firms now offer ESG investment funds, which you can find by searching their websites or calling to speak with a company representative.

If you have a financial advisor, they can help you to assess and adjust your current portfolio from a sustainability perspective and to choose sustainable investments that match your values going forward.

The Importance of a Diversified Financial Management Plan

All investments, whether traditional or sustainable, carry risk because the market fluctuates. So as you try to grow your net worth, it’s important to maintain a diversified financial management plan that balances that market risk with savings products that are federally insured for up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Including such safe products like high-yield savings accounts and term accounts in your portfolio helps it to withstand times of high market volatility caused by things like global unrest, supply chain disruptions and inflation.