6 Questions on Sustainable Investing That You Need to Ask Your Financial Advisor
In the last few years, many investors have faced moral dilemmas about their investments. Directly or indirectly contributing to a company’s growth that may be responsible for the destruction of natural resources or promoting unethical work practices, has led to a shift to sustainable investing. Also known as Environmental Social and Governance investing (ESG), sustainable investing is a way to do business and grow your wealth ethically.
Since sustainable investing is a fairly new genre of investing, there is still a lot of ambiguity surrounding the topic. However, if you wish to embark on this road, here are 6 important questions that you need to ask your financial advisor.
Question 1: What are the types of sustainable investing?
Sustainable investing has come to be known by different names in the market. This often also creates some confusion in the minds of investors. If you are concerned about this, you can ask your financial advisor about the various forms of sustainable investing. Broadly, you can categorize sustainable investing into three types:
- Environmental Social and Governance investing (ESG): ESG investing encompasses factors related to environmental issues, social concerns, and a company’s internal governance problems. This can include, energy consumption, human rights, child labor, the quality of the company’s management and their conflicts, climate change, animal welfare, health and safety of employees, ethnic diversity at work, etc. Under ESG investing, these factors can have an influence on the performance of a particular investment. Investors typically look for companies that pay attention to these aspects.
- Socially Responsible Investing (SRI): Under SRI, investors typically eliminate companies and investment opportunities that do not align with their political, religious, or personal ideologies. This can include not wanting to invest in a meat company due to religious concerns or avoiding a mutual fund that further invests in an alcohol company. Usually, activities like terrorism, negative environmental impact, manufacturing of weapons, tobacco, and alcohol, etc. are excluded from the investment list.
- Impact or thematic investing: As the name suggests, the focus here is on the impact of your investment. The primary agenda of investing in such companies is to benefit the business in a way that creates a positive impact in the world. For example, you can invest in a non-profit organization that works towards creating a greener and cleaner planet.
You can ask your financial advisor for help in these categories. After understanding your options and the probable outcomes of your investments, you can make a decision to invest in one or all three of these.
Question 2: Is sustainable investing a short-term investment practice?
A lot of investors believe that sustainable investing is only a trend that may not be able to withstand investing principles for the long-term. However, this is far from reality. Sustainable investing is centered on fair work opportunities, safe workplaces, pollution management, safety, and privacy, among other things, but it still works on the principles of traditional investing and financial analysis. These investments are as diverse and aggressive as other forms of investments. The only difference is that they keep in mind your moral code of conduct. You can ask your financial advisor to suggest a suitable investment tool depending on the time horizon of your goals.
Question 3: How do sustainable investing principles affect a company?
Sustainable investing practices have brought a considerable change in the way many industries and companies function. With growing awareness on issues such as climate change, employee diversity, and more, many companies have been questioned by shareholders. For instance, the multinational oil and gas company, Exxon Mobil has used fossil fuels as an energy source for its operations since its commencement. However, the company’s shareholders passed a resolution with a 62% vote in 2017 demanding the company to share a yearly report on its effect on climate change. These shareholders included names like Vanguard, California Teacher Retirement System, and State Street Global Investors, among others. It was discovered that the shareholders were all worried about the investment and financial impact of transitioning to a cleaner energy source since the company had primarily always used fossil fuels.
It is important to understand how a socially responsible transition can affect the stocks of a company, and a financial advisor can break this down to how you can be impacted by such a change as an investor.
Question 4: How do I create my portfolio for sustainable investing?
A lot of financial advisors suggest the form of elimination to derive at your desired portfolio. Most sustainable investors are certain about not investing in companies associated with weapons, child labor, poor workplace diversity, pollution, etc. Making a list of such things can help you cut out names from your list of possible investment opportunities. Knowing where you stand in terms of principles and ethics helps in charting out your portfolio. However, you must also remember that sustainable investing is a form of investing and by that virtue it requires you to put your hard-earned money in the market. Therefore, instead of just eliminating companies, your decisions should also be governed by financial analysis. It helps more to try and transition to a portfolio that is more focused on sustainability principles gradually. This can be a slow shift, but with more and more companies joining the sustainability movement, it is becoming easier for investors to look out for profitable investments.
Question 5: How can you decide if a company is socially responsible?
Social responsibility can mean different things to different people, based on their personal, religious, and political views. For instance, Beyond Meat has emerged as a major player in the food industry with giants like Kentucky Fried Chicken (KFC) including the vegan meat in their menu. A shift to veganism has brought a demand for meat alternatives, but the option may seem outright strange for a non-vegetarian.
A study carried out at the Massachusetts Institute of Technology (MIT) also concluded that it can be hard to find a rule for sustainable investing that fits all companies. This is also the reason why ESG ratings can sometimes differ so widely. The ratings can at times be weighted towards environmental factors and at other times towards social responsibility, such as safe work practices. A better way to decide if a company is responsible or not is to align your requirements with the investment manager’s goals and strategies. It also helps to understand the company’s primary objectives and see if that connects with your personal principles.
Question 6: Are the returns from socially responsible investments lower than traditional investments?
The returns from an investment can vary based on the tool you choose. Sustainable investing brings forth instruments, such as exchange-traded funds (EFTs), equities, private equities, fixed income corporate bonds, green bonds, real estate funds, money market tools, mutual funds, hedge funds, etc. However, sustainable investing is not all about returns. The basic foundation of social investing is to bring a change in the way the world functions. It is also believed that the values of social investing are the future of the world and slowly but surely, all companies will have to shift to these ethical practices. This implies a better financial outcome too. Your financial advisor can help you find opportunities of great returns even with a portfolio filled with sustainable investments.
To sum it up
Sustainable investment is here to stay and has already brought about a lot of change in the market. Many shareholders are actively demanding newer and improved company policies. Investors around the world are inclined towards including more socially responsible investments in their portfolios. However, it remains a new dimension which can sometimes cause some confusion and misconceptions for investors. A financial advisor can help you clarify the doubts in your mind and move ahead as per your goals.
If you have any other questions on sustainable investing or would like to invest in ESG companies, you can get in touch with a financial advisor.