The recent surge in the popularity of sustainable investing may signal the beginning of a fundamental shift in investing, as people begin to see both the promise and necessity of supporting companies poised to face the challenges of the future. For those who feel passionately about promoting green initiatives and environmentally sound companies, it seems like an easy choice – after all, who wouldn’t want to invest, earn potentially great returns over the long-run, and promote a worthy cause? But is it too good to be true? Understandably, many investors have doubts and questions.
The potential is huge, but what are the realities of investing this way?
Sustainable investing is generally done through mutual funds and exchange traded funds (ETF), investment strategies that let you pool your money with other investors to purchase diversified collections of stocks or bonds. These funds have stated objectives and goals dictating what stocks they include and how they invest.
When you choose to invest with a sustainable goal, you are promoting companies using renewable energy, cutting pollution, and reducing their carbon footprint. By pooling money with other investors, you are increasing the demand of these corporations’ stock and driving up the price. You are supplying capital to these companies so that they continue to grow.
As shareholders, many of the mutual funds that invest your money into these companies have voting rights and, therefore, the ability to guide these companies toward green initiatives or more socially progressive goals. Qualities that are looked at to determine the score of a company may include energy use, waste, pollution, carbon footprint, or even treatment of animals.
Chances are, you own mutual funds that are not invested with this kind of agenda. If this is something that you do feel strongly about, it could be a way to bring some of your values to your investment portfolio.
What about returns?
One of the most common concerns we hear about sustainable investing is the idea that it will hurt returns.
In the past, that notion was largely due to costs. Sustainable-specific funds could be very expensive to invest in, which would ultimately translate into lower returns.
But because this area is becoming so much more popular, with so many more options to choose from, costs have dropped significantly. Many mutual funds or ETFs that invest with this goal in mind generally do not cost more than their standard counterparts.
When it comes to actual return numbers, ignoring fees, studies show that there is no consensus that they historically underperform when compared to other funds. Certain industries may be represented less in a sustainable portfolio, like oil and gas, which can and almost certainly will cause the sustainable options to differ in returns from the rest of the market.
However, whether that is generally a positive or negative impact on returns is not conclusive. Many of these sustainable options perform better historically. Maybe that’s because companies focusing on these initiatives tend to be more progressive, adaptable, and agile in a rapidly changing world. It even could be a result of the recent hype this type of investing has received. It could just be pure luck.
So, what should I do?
Investing with a sustainable goal is not for everyone, but it is one of the simplest ways an investor can move the needle on climate change, social issues, and better corporate governance.
Returns will vary when compared to standard portfolios because of the exclusion or underrepresentation of many industries and stocks. If this is something you are passionate about, however, you may want to look at available options in your retirement accounts, for example.
You could also ask your investment adviser what options they have for sustainable investing. Your money has power, and in the world of investing, it gives you a voice to choose whom to support. How you invest could very well change the actions and directions of major corporations, and, at the same time, provide you peace of mind that your dollars are aligned with your own values.
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Jake is a Certified Financial Planner and Wealth Advisor at Willow Creek Wealth Management. Willow Creek is a fee-only financial planning firm in Sonoma County, CA serving clients throughout the San Francisco Bay Area and across the country. Willow Creek offers comprehensive financial planning encompassing investment management, retirement planning, tax planning, charitable giving, sustainable investing, and more.