Most people want to feel secure about their portfolio’s current and potential value. Some people also want to feel secure that they’re investing in companies that do no harm or improve society and the environment—otherwise known as sustainable investing.
If you’re interested in sustainable investing, approaches have become more sophisticated in recent years, said Colleen Silver, head of advisor engagement and sustainable investing for Truist Advisory Services, Inc., on Episode 15 of our podcast, I’ve Been Meaning To Do That. Shifts in global policy and in societal behavior have increased interest in sustainability and driven innovation in the field.
This evolution of increasing opportunities for impact, added Bill Lyons from Truist Wealth’s Center for Family Legacy, is part of a larger trend. Individuals and families are becoming more clear about their values and the many ways to have impact in alignment with their values in investments, philanthropy, businesss ownership, and consumer choices.
“Sustainable investing of 10 years ago largely was executed by removing investments from your portfolio that didn’t align with your values, or what we and others refer to as negative screening,” Silver said. Negative screening is still one way to practice sustainable investing, but many more techniques have emerged since then.
Techniques for sustainable investing
Here are three sample avenues for people to practice sustainable investing:
- ESG (environmental, social, and governance) integration. This approach focuses on how these themes affect a company financially. ESG-integrated investments consider how a company’s ESG practices are going to affect its value over the long term — how the company manages its use of natural resources efficiently or the long-term impact of treating employees fairly.
- For example, if a company engages in fair labor practices and treats its employees well, worker productivity might increase and have a positive impact on revenues and costs.Disclosure 1
- Thematic sustainable investments. These investments intend to drive or benefit from sustainable themes.
- For example, a thematic investment focused on climate could focus on companies producing technologies that reduce greenhouse gas emissions or investing in equipment that decrease these emissions.
- Impact investments. These investments seek to make a positive social or environmental impact while generating a positive financial return.
“A great example of an impact investment would be a venture capital strategy that invests in the climate theme,” Silver said. “Some of the underlying portfolio companies could be, for example, developing new technologies around battery storage, or focused on carbon capture technology. In doing so, they’re expressly saying these investments are going to take a certain amount of greenhouse gas emissions out of the air or prevent them from being released in the first place.”
More data about sustainable practices
Investors who want to practice sustainable investing not only have more techniques available than before, they also have access to more data about a company’s sustainable activities. Many companies publish annual reports with information about their environmental, social, and governance activities. Examples of the types of data you might find include:
- Percentage of management composed of people of color and women
- Average hourly wages
- Policies about supply-chain sourcing
- Energy use and efforts to conserve energy
- Annual greenhouse gas emissions and projects to reduce emissions
Funds dedicated to sustainable investing strategies also are providing more information. “New regulations are starting to ask for more transparency from investment managers on how they’re investing sustainably,” Silver said. “You’re seeing some funds close that maybe were not the highest quality or clearest expression of sustainable investing. And we support that, because what’s left are strategies committed to sustainable investing.”
Is sustainable investing right for you?
Not everyone is interested in sustainable investing, but Silver identified reasons investors are drawn to it like wanting to align their portfolios with their values or make an impact.
They also might believe they can improve investment returns. “These might be investors who think that companies that are really attuned to their role in society, sensitive to how they treat their employees, and careful about maximizing their environmental resource efficiency will actually be worth more over the long term,” Silver said.
To determine your interest, Silver suggested asking yourself several questions, including:
- When’s the first time you thought about sustainable investing?
- Have you seen any articles about companies engaging in behavior you find offensive and became concerned those companies were in your portfolio?
- Do you participate in a nonprofit or donate to certain charities and are wondering how else you can support their cause?
“Also, we always recommend you bring up your feelings around investing to your advisor,” Silver said. “When you think about your investment portfolio, what emotions come up? Do you feel a sense of pride or are you uneasy about what you might be holding in your portfolio, or maybe both?”
It might require several conversations with your advisor before your motivations become clear. Then you can revisit this discussion periodically.
“Your values and priorities might shift, and the size of your wealth may shift as well,” Silver said. “And that will all inform where you want to focus.”