What Is Sustainable Investing and How Can You Get Started?

wind turbine technician at sunset
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Investors today have many options when it comes to allocating their resources. Socially responsible or sustainable investing is a growing trend where individuals can invest in companies whose mission matches their values.

It’s a way to maximize the benefits for the environment and society at large, not just a small group of shareholders. Keep reading to learn about sustainable investing and how to get started.

What Is Sustainable Investing?

Sustainable investing is an investment approach that considers more factors than pure profit. For example, sustainable investors also think about social and environmental factors when making decisions. This type of investing intends to benefit society, the environment and shareholders at the same time.

Did You Know?

Sustainable investing is known by various names. You might hear it called ethical investing, socially responsible investing, impact investing or values-based investing. No matter what name it goes by, the mission and values of the approach are similar, although the way each strategy achieves the goal could vary.

How Is Sustainable Investing Different?

Every for-profit business makes it a priority to generate profits. It’s what keeps the company going and rewards owners and shareholders. Sustainable investment firms are no different in this respect.

However, companies concerned with sustainable investment have additional, measurable factors they consider. For example, analysts and investors consider environmental impacts like water use, conservation, carbon emissions and more. Social factors are weighed, such as community development, anti-bias issues, diversity issues and workplace safety concerns. Governance is also a key factor, including topics like board diversity and corporate political contributions.

Another way that sustainable investing is different is that some investors will not invest in specific industries or companies that don’t align with their values. For example, some people may avoid investing in companies that deal in gambling, alcohol or tobacco industries.

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Sustainable investment means that individual investors can invest in enterprises that better align with their values.

How To Invest Sustainably

With an emphasis on something beyond pure profit, you might wonder if you can make money with sustainable investing. In fact, the data shows that sustainable funds outperformed both traditional funds and indexes, on average, according to a 2021 report by Morningstar.

The report also shows a trend of sustainable investing becoming more popular. For example, it is estimated that one in three dollars of overall assets under management in the U.S. is involved in some type of sustainable investment strategy.

Here are some ways you can invest sustainably.

ESG Funds

Mutual funds focused on environmental, social and governance principles are an easy and excellent way to get started with sustainable investing. Here are some of the top sustainable funds, according to Morningstar:

Fund 2020 Annual Return Morningstar Rating Overall Morningstar Sustainability Rating
1919 Socially Responsive Balanced Fund Class A (SSIAX) 20.57% 5/5 5/5
AB Sustainable International Thematic Fund Class A (AWPAX) 29.55% 3/5 5/5
American Century Sustainable Equity Fund A Class (AFDAX) 18.98% 4/5 5/5
Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX) 24.82% 5/5 5/5
Eventide Dividend Opportunities Fund Class I Shares (ETIDX) 25.35% 5/5 5/5

These and other funds are excellent options for sustainable investing.

Sustainable Stocks

If you want more control over the businesses you invest in, you could consider investing in individual companies directly. It’s important to note that investing in companies directly is considered riskier than a fund because, in a fund, you benefit from the diversity of the fund. However, you do have more control over your portfolio when investing in individual businesses.

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Water Stocks

You could consider investing in water stocks that collect, purify and distribute clean and safe water. For example, American Water, founded in 1886, provides over 14 million people with drinking water. Aqua America, a well-established company operating for more than 130 years, provides water to more than 3 million people.

Wind Stocks

Wind stocks are a popular way to invest in renewable energy. Wind-generation capacity has skyrocketed over 75 times in the past 20 years. General Electric offers several solutions for wind power, including onshore and offshore wind turbines. NextEra Energy Partners oversees clean energy projects with stable, long-term cash flows.

Solar Stocks

You could also consider solar stocks, another source of renewable energy. First Solar is a leading global provider of solar energy solutions, and SunPower designs residential and commercial solar power solutions.

Managed Investing and Robo-Advisors With Sustainable Portfolios

Suppose you like the idea of sustainable investing but don’t have the time to research companies yourself. In that case, you could consider managed portfolios and/or robo-advisors that focus on socially responsible companies. Here are some to consider:

  • E-Trade Core Portfolios
  • Betterment
  • Axos Invest
  • Ally Invest Managed Portfolios
  • TD Ameritrade Essential Portfolios

Key Takeaways

Sustainable investing is a popular and profitable investment strategy for individuals who want to impact society and the environment. Here are some key takeaways about this type of investing:

  • Sustainable investing is a way for investors to generate financial returns and invest in companies that align with their values.
  • Other factors beyond sheer profit are considered, including environmental and social considerations.
  • Almost a third of all assets under management in the U.S. are now involved in sustainable strategies.
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