Sustainable investing and how to align your investments with your values

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Depending on your personal values, you may have moral opposition to certain types of companies. In my experience, this has caused some people to give up investing altogether, crippled by the fear that they might accidentally fund something they think is wrong. This is an essential guide to sustainable investing and how you as an investor can align investments with your values ​​while increasing your personal net worth.

What is sustainable investing?

Sustainable investing is typically measured by considering three different factors: environment, social impact and corporate governance. This is also known as ESG. Unlike passive investing in index funds, sustainable investing requires deep insight into each company’s impact.

This can sometimes be done by experienced individual investors, but is often done more effectively by investment managers who have the tools to evaluate each company. Fund companies will often weight each category and assign a sustainability score to a company, which determines whether a company can be included in a sustainable portfolio. Fund managers have different sustainability standards, so it’s important to review the selection criteria to see if the values ​​match yours. Working with a qualified financial professional can simplify this and ensure that your financial goals are met.

I strongly urge caution from investors who want to pick individual companies themselves, because doing so can result in disproportionately high risk relative to expected returns. It is possible to diversify sufficiently by investing sustainably.

Environment

There are many ways in which a company can affect the environment that investors can turn to. These include corporate environmental policies, greenhouse gas emissions, waste policies, impact on natural resources, pollution levels and animal welfare.

In my experience, the criteria for environmentally conscious portfolios have the least variation between fund companies, as many investors looking for sustainable funds have priorities that align here.

Social impact

Social impact is one of the most diverse definitions of sustainability. Basically, social impact refers to a corporation’s impact on society. Funds can have different social priorities, including:

• Alignment of investments with certain religious beliefs and practices
• No use of exploitative labor practices such as sweatshops
• Missions aligned with diversity, equity and inclusion
• Avoiding companies that contribute to health crises and addiction, such as tobacco and some pharmaceuticals

If the social impact of your investments is a priority, it’s important to consider what social impact you want your investments to have and find a fund that invests accordingly.

Corporate management

The term corporate governance focuses on the management of the company. Some investors may not want to invest in a company they generally like but has leadership they disagree with. Let’s say you have a company that has the best environmental policies and positive social impact, but the CEO is a total bully, resulting in high turnover and an inconsistent product.

Corporate governance criteria may include the following:

• Transparency of corporate accounting and finances
• High levels of integrity for those in leadership
• Diverse leadership hires
• Responsibility to shareholders
• Reducing and disclosing conflicts of interest

If investing in companies with strong corporate governance is a priority for you, it’s again important to consider your own priorities and make sure the fund’s mission is aligned with yours.

Putting all this into practice

As I said, it is possible to align your investments with your values ​​and still increase your net worth. When investing sustainably, it’s still important to have a diversified portfolio invested with your goals and risk tolerance.

Let’s say we have a 40-year-old investor whose goal is to retire at age 55 and who has a moderate risk tolerance. She wants to invest in a sustainable portfolio of investments that matches her risk tolerance. For this investor, she might have a portfolio of 60% stocks split between small, medium and large companies, globally diversified and passing through environmental, social and governance filters. Since she is a moderate investor, we would also like to have some of her portfolio in fixed income or debt investments. This fixed income can be corporate debts of companies that we have already filtered. It may also include sovereign debt that meets the same criteria specified by the investor.

After all, if sustainable investing is a priority, working with a qualified financial professional can help simplify this process and align your investments with your values.

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