Incorporating Sustainable Investing Into Your Portfolio

Question of the Week

Incorporating Sustainable Investing Into Your Portfolio

Happy Friday Everyone!

I’m finding now more than ever that clients want to incorporate their values into their investing portfolio. This request often involves excluding investments that support or produce fossil fuels, private prisons and weapons. While this was much harder and more expensive even just a few years ago, we have a lot more tools at our disposal now to incorporate these types of investments without sacrificing cost or performance.

My friend and colleague Phuong Luong is starting a series on sustainable investing for Morningstar. While it’s geared towards advisors, those of you interested in this type of investing can learn a lot from it too.  Here’s a portion of her article:

What is Sustainable Investing?

For now, let’s start at the beginning. I’m using the term “sustainable investing” intentionally because it encompasses ESG (short for “environmental, social, and governance”), socially responsible investing, and impact investing. But no article on sustainable investing is complete without a brief overview of terminology because, unfortunately, these terms aren’t currently used in a standard way within the investment industry. As an aside, as research for this column I reviewed a dozen articles from major asset management firms to understand how they define sustainable investing–and all used slightly different terms to communicate the same concepts. This can be incredibly confusing for advisors and investors who want to incorporate it into their portfolios.

Here’s a quick summary of the commonalities. “ESG” investing integrates the environmental, social, and governance practices of companies as material risks to guide investment decisions. ESG investing relies on data and research for security selection and portfolio construction. “SRI” or socially responsible investing, focuses on excluding or including certain industries based on the ethical or moral values of investors. Shareholder engagement and proxy voting are other key features of SRI-based strategies. “Impact investing” traditionally refers to private sector investments outside of public markets, such as direct investments to benefit specific communities, small businesses, and burgeoning industries. Impact investing can also refer to public investments, with a focus on positive outcomes to the environment and society, usually within specific themes.

You can say that ESG data looks back, SRI focuses on present action, and impact investing aims to influence what’s possible in the future. And essentially, sustainable investing can mean one of those tools or any combination of all three.

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Quote of the Week

“An investment in knowledge pays the best interest.” — Benjamin Franklin


Task of the Week

If you want to match your investments with your values, take some time this weekend to check out Phuong’s article on Sustainable Investing. For more on Phuong, you can listen to her episode on the Mission Driven Business podcast. Additionally, check out my piece on Community Development Financial Institutions to find out how your investments can leave an impact.