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There’s an unfair assumption that all corporations put profits first and couldn’t care less about our fragile environment. But like many assumptions, that’s not true.
In fact, there are a lot of companies focusing on sustainable practices to protect the Earth. And you can invest in them to both lend your support and make some potential profits along the way.
In this guide to sustainable investing, we’ll explore how you can make money from doing good for the planet.
What Is Investing in Sustainability?
Dictionary.com defines sustainability as “the quality of not being harmful to the environment or depleting natural resources, and thereby supporting a long-term ecological balance.” You will often see companies in the agricultural and retail industries talking about sustainability.
Investing in sustainability means investing in companies that take sustainability seriously.
Sustainability Isn’t a New Concept
The EPA’s discussion of the importance of sustainability started with the National Environmental Policy Act of 1969. It was one of the first laws that focused on protecting future resources and considering the social, economic, and environmental impacts of business practices. Decades later, concerns about climate change and environmental damage are still being discussed and researched for future generations.
Reduce, Reuse, Recycle
Us older millennials and prior generations might remember the EPA’s Reduce, Reuse, Recycle campaign. This simple alliteration got us thinking about sustainability and how small, simple actions can have a large impact.
In addition to Reduce, Reuse, Recycle, the EPA’s site has several other resources for greener living. Topics include Living Sustainably, Being Green on the Road, Throw Away Less, Choosing Greener Products & More.
Sustainable Investing vs. Socially Responsible Investing (SRI
When researching sustainability and social responsibility in investing, many common terms will seem interchangeable. One term I have been seeing often is ESG, which stands for “Environmental, Societal, and Governance” factors. ESG, socially responsible investing, and sustainability all seem to be intertwined.
Sustainability and socially responsible investing aren’t exactly interchangeable
Although these types of investing terms seem to be interchangeable, there are some subtle differences. Sustainability is a subset or part of socially responsible investing corporate social responsibility. By definition, sustainability focuses primarily on the environmental factor. Socially responsible investing as a whole is the “big picture.” Sustainability is in the details.
However, when sustainability was one of the top buzzwords in my MBA program, it referred to the likelihood of a company being able to take action for the long term. Is this variable sustainable over time? Sustainability is often synonymous with long-term impact.
Other terms for sustainability
The Forum for Sustainable and Responsible Investment is a great resource to learn more about investing in sustainability. Other terms that describe sustainability are ethical, community, or impact investing. You may also see green, mission-related, or socially responsible investing.
How to Invest in Sustainability
You can start with an SRI investment strategy. Betterment has created three portfolios of low-cost exchange-traded funds (ETFs) that focus on SRI practices. Along with Social Impact and Broad Impact portfolios, Betterment offers a Climate Impact portfolio that supports companies working to mitigate climate change.
Morningstar has created its own sustainability rating. FinancialMechanic.com has broken it down: Morningstar deducts points from a corporation’s sustainability rating if there are ESG problems, lawsuits, or other issues. This is one option for finding sustainable funds.
Partnersinfire.com mentions two other sources for sustainability reporting: MSCI ESG ratings and Sustainalytics ESG Ratings. Although different agencies have different standards, you can research them and see which most align with your values.
If you want to make an even more positive impact with your investing, partnersinfire.com also mentions an impact-investment reporting process that is even more thorough than sustainability reporting.
Disadvantages of sustainable investing
There are disadvantages to a responsible investing strategy using ESG issues, sustainability, or social responsibility.
Standardization and lack of information
One issue with sustainable investing is financial return. Data shows that there isn’t a strong argument that sustainable investing, or socially responsible investing at the higher level, outperforms other investments.
A big issue is a lack of information. ESG scorecards, sustainability reports, and other SRI data don’t have a standard governing body or data-reporting tools. This also causes a lack of transparency in what companies could be in the different sustainable funds.
Research and due diligence
Another disadvantage to sustainable investing is research and due diligence. This may be a disadvantage only to passive investors. For those who want a “set it and forget it” investment strategy, sustainability may require further research. Because of the lack of standards and transparency, further research is required to make sure you are investing according to your values and the impact you wish to make.
Alternative Ways to Invest in Sustainability
You don’t have to directly invest in sustainability through mutual funds. There are other ways to invest directly. Invest in companies that you value by purchasing their goods and services or stocks.
Recommend your favorite companies to others and mention that you love their products and that the company believes in corporate responsibility as well. Show others how the company makes an impact on their communities.
Building a Sustainable Lifestyle
Many on the path to financial independence often review and cut expenses. Often, this means downsizing or practicing minimalism. One benefit to this is its impact on sustainability.
Rather than buying several disposable, low-quality items, those on the financial independence path practice value-based spending. Often, this means buying higher-quality products that last longer and are made to have a smaller environmental impact.
Many in the financial independence community invest in solar panels. Why? Solar panels can reduce dependence on electricity as well as lower costs. The savings from switching to solar panels and electric vehicles monetary and environmental benefits on our climate.
Why does the financial independence community love electric vehicles? They don’t require gasoline. Aside from money savings, using an electric bike (as well as non-electric) is good exercise. Health is wealth, right? As electric cars get more popular and more charging stations become available, we can travel further without the need for gasoline and the environmental impact it causes.