There is more than one way to measure the success of your portfolio. Although the returns it brings you are the primary metric by which you evaluate its performance, many investors today are taking a more holistic approach. This is why so many have adopted sustainable investing as a core principle to guide their investments.
By taking a broader look at the effect their money has beyond the bottom line, investors gain peace of mind as well as a proven strategy that builds better returns overall when compared to other plans.
What is sustainable investing, and what could it mean for you? Read on to learn the basics about this philosophy and how it can help you build a portfolio that is successful in more than one way.
The Idea Behind Sustainable Investing
At the center of sustainable investing is the idea that your investments can be an agent for positive change in the world beyond the simple economic impact. In short, it means that an investor uses his or her values to help guide decisions about where to invest.
For example, someone who feels strongly about protecting the environment might choose not to invest in companies involved in fossil fuels. A person who has a strong moral aversion to gambling would decide not to buy stocks for companies that own casinos. A pacifist would most likely avoid investments that would go to weapons manufacturers, etc.
In many ways, this concept is like environmental, social and governance (ESG) investing. The key difference is that ESG investing uses specific categories to measure the sustainability of an investment. These are based on the company’s internal environmental practices, policies around diversity and social justice, and political activity.
A growing number of publicly traded companies are engaging in ESG reporting because they have seen the appeal it has to a large segment of the investing community. ESG and sustainable investing have a connection to the larger idea of thematic investing, which guides investments based on long-term trends in the world.
Why Are So Many Considering Sustainable Investments?
Over the last few decades, there has been an increasing awareness of the connection financial markets have with other aspects of the world. Many investors want their money to support businesses that have values that are more aligned with their own.
One of the benefits of ESG investing for these investors is that they can feel better about where their investments are going and how they will be used. For instance, adding renewable energy stocks to your portfolio not only means you can take advantage of trends that mean greater profitability for those companies, but also know that you are contributing to a reduction in greenhouse gas emissions and doing something to fight climate change.
What Are the Benefits of Sustainable Investing?
The advantages of ESG investing and other sustainable investment practices go well beyond the idea of investments as a force for positive change. If you choose to follow this strategy when building your portfolio, you also put it in a potentially better position for greater returns. Companies that have a stronger ESG rating tend to have a lower risk exposure, for example.
Participating in activities such as offshore drilling or coal mining not only are harmful to the environment, but also introduce the potential for more volatility into a company’s stocks. Businesses with higher ESG ratings also typically employ stricter risk monitoring.
Ultimately, the success of your portfolio depends on how well your stocks perform. However, it’s clear to see that the concept of sustainable investing can have a profound impact on your returns as well as the impact you have on the world. This is why you may want to consider using these ideas as your framework when looking to the future.