Take a Sustainable Approach in Your Investing

You care about the environment. You support your community. You treat everyone fairly. Does your investment portfolio reflect these values?

Investors are increasingly interested in socially responsible ways to save for their goals, but confusion remains on how to do it. This article highlights ways to align your investments with your values, why it matters, and how to get started.

Socially responsible investing goes by many names, including sustainable investing, impact investing, green investing, and ESG investing. These are general terms that basically mean the same thing: strategies that seek financial returns for investors while also having a positive impact on society and the planet. They are all based on the premise that good corporate behavior is linked to better business results.

Traditional investing pursues attractive opportunities to generate growth and income with an appropriate level of risk. Sustainable investing balances traditional investing principles with environmental, social, and governance (“ESG”) insights that seek to improve long-term outcomes for investors, our communities, and the planet. In many ways, ESG is an evolution of investing, and there is growing evidence that ESG factors add value to the investment process.

What does ESG stand for?

Environmental: The way a company uses its resources and manages its environmental impact to protect the environment. This includes: climate change natural resource use water usage carbon footprint recycling waste management

Social: A company’s policies and practices toward employees, suppliers, customers, and communities. This covers: health and safety labor management employee treatment and compensation pay equality human rights lobbying efforts

Governance: Evaluates a company’s corporate policies and procedures, including: board composition and diversity executive compensation accountability and transparency business ethics

 

5 Reasons to Invest in ESG now:

1. Risk Management – Challenges such as climate change, increased regulatory pressure, and privacy and data security concerns represent new or increased risks for investors. It is important to understand how companies you invest in are handling these risks. Well-managed companies that utilize ESG practices tend to take a long-term view, actively managing risks to their business.
2. Increasing Demand – Interest from investors, particularly millennials, is growing and driving the rapid growth of ESG investment strategies. In the coming decades, as wealth shifts from baby boomers to Gen Xers, millennials, and Gen Zers, demand for investing in sustainable corporations will increase.
3. Better Data – Advancing technology, including artificial intelligence and alternative data, allows better data collection and analysis of relevant ESG factors. Research firms and index providers, such as MsSCI, have created scoring mechanisms that help investors understand business’ ESG efforts and behavior.
4. Return potential – ESG strategies used to carry the stigma that you need to make concessions to participate. However, research shows you don’t necessarily have to sacrifice performance when choosing investments that make a positive impact. ESG funds have the potential to generate attractive returns by uncovering additional risks and opportunities in a company.
5. Access – There is an expanding universe of choices. Many financial advisors and investment managers now integrate ESG investing into traditional financial analysis and portfolio management. ETFs (exchange-traded funds) give all types of investors easy access.

 

 

How to invest

Investing in ESG does not have to be complicated. There is a comprehensive and growing range of ESG investment products available across U.S. stocks, foreign stocks, and fixed income asset classes.

ETFs provide an accessible and affordable approach to ESG. There are many ETFs available that integrate a broad set of ESG issues into an investable index.

Think of these ESG securities as building blocks to construct a well-diversified, cost-effective portfolio designed to meet your objectives such as growth, income, and/or capital preservation. You can purchase ETFs focused on ESG through a self-directed brokerage account or with the help of a financial advisor.

• You can build a well-diversified global portfolio of ESG stocks and bonds with as few as 3 to 6 ETFs. This might be appropriate if you have the cash to invest in a new portfolio with a socially responsible objective.
• You can also take a more targeted approach and invest in a specific ESG issue or theme. This might be appropriate to add an ESG tilt to your current portfolio. There are ETFs focused on clean energy, electric vehicles, climate change, green building, and impact investing.

Risks

There are some unique risks to ESG investing. When investment portfolios avoid certain companies due to ESG factors, they tend to overweight other stocks and sectors as a result. That means investors could be exposed to more risks in some areas than an investor in a standard all-stock fund. Specifically, an ESG investor may be taking more small-cap risk, interest-rate risk, inflation risk, and single-stock risk.

Investors should be aware of these risks when selecting an ESG strategy.

 

 

Final Thoughts

Investing in responsibly managed companies makes good sense.

You can choose to invest sustainably by investing in companies and funds with the purpose of generating social and environmental impact alongside financial returns.

By combining traditional investment approaches with environmental, social, and governance insights, investors are increasingly taking a sustainable approach to pursue their financial goals.

As interest in ESG continues to grow, financial advisors and investment providers are increasingly offering sustainable investment solutions to investors. There are many investment choices available that seek to provide both the potential for growth and positive impacts for the environment and society.

 

Steve Tuttle
Partner, Chief Investment Strategist
Signet Financial Management, LLC
For more information, please contact Steve Tuttle at (800) 390-2755 or stuttle@signetfm.com.

 

Signet Financial Management, LLC is a wealth management firm that takes a personal approach in helping high-net-worth families, individuals, and business owners navigate the complexities of their wealth. 

Main office
400 Interpace Pkwy
Building C, 2^nd Floor
Parsippany, NJ 07054
www.signetfm.com
(800) 390-2755

 

Important Disclaimers

Signet Financial Management, LLC (“Signet”) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended. For additional information, visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov and search Signet’s CRD #105310.

This article is intended to provide general information. It is not intended to offer investment advice or recommend the purchase and sale of any investment product.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.