Investing with Impact: How Green is Your Portfolio?
Investing in companies that are environmentally friendly can help the planet and your wallet
Climate change has taken centre stage in recent years, and when it comes to investing, it's hogging the spotlight. Indicative of investors' of the trend towards socially responsible attitudes, The Global Sustainable Investment Alliance notes that sustainable investments reached $35.3 trillion in five major markets at the start of 2020 - a 15% jump between 2018 and 2020 alone. This figure is estimated to surpass $50 trillion by 2025.
Green investing isn't just about doing good - research shows that investing to protect the environment can also deliver high returns that are comparable to or even better than investing in traditional assets. Green investing is a great way to put your money where your values are and be part of the fight against global warming. So how green is your own portfolio? Let's find out shall we?
What is green investing?
Investing green can be an empowering way to make a positive impact on the environment. A key part of green investing is committing to investing in companies and projects that are focused on conserving natural resources, reducing pollution in their operations, and investing into other environmentally conscious business activities. This kind of investing is often lumped together with socially responsible investing (SRI) and environmental, social, and governance (ESG) criteria under one umbrella. Green investing specifically focuses on companies or initiatives that actively seek a more positive environmental outcome from their products or services. Additionally, investors may also look at investing in Exchange Traded Funds (ETFs) with female CEOs or female-led companies. Investing green allows you to help create sustainable profits while looking beyond just the bottom line.
Is my portfolio green?
The thing is, you might have investments in your portfolio that are green without even realising. Or maybe you've already actively sought out green investments in your attempt to align your values with your wallet. But how do you know whether they're actually green? Many companies have been exposed for 'greenwashing' and pulling the wool over the eyes of customers and investors in recent years. So it's down to you to figure out whether the companies you've invested in are as green in their actions as they are in their words.
So do you know what the company's you've invested in spend their money on?Most people don’t know what the company uses their money for. And many others actually feel uncomfortable when thinking about the fact that their money could be used to finance, for example, the development of a new weapon or polluting activities in low-income countries. But with these simple steps, you can make the steps towards an environmentally conscious portfolio.
1. Negative screening
One way to avoid providing your money to companies that behave unethically or unsustainably is simply to avoid them when making investment decisions. This approach is often referred to as negative screening (exclusion). Negative screenings usually avoid companies that are engaged in weapons, tobacco, gambling, or alcohol, amongst others. They also include those with have unacceptably high carbon footprints, poor labor relations, particularly linked to the non-payment of living wages. The list goers on. The bottom line is that negative screening can help you weedle out the wheat from the chaff when handpicking stocks for a portfolio.
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2. Positive screening
If you're on a mission to build an environmentally friendly portfolio, you can undergo a simultaneous process of positive screening. This opposite approach is to only buy stocks from companies that show an exemplary behavior with respect to ethical or environmental topics. This is often referred to as positive screening (best-in-class investing). It means finding companies that have stellar environmental records, admirable labor practices, a mission to achieve gender equality, and good governance of issues such as keeping well out of the way of controversies.
3. ESG screening
There is yet another way of assessing the sustainability of a stock or portfolio. Nowadays, rating agencies assess a companies’ ESG (environment, social, and governance) standards and reward them with so-called “ESG scores”. ESG leaders (high ESG score) are firms that have, for example, high environmental standards while ESG laggards (low ESG score) are considered less engaged in managing climate change or social issues. It basically offers an objective measurement or evaluation of a given company, fund, or security's performance with respect to Environmental, Social, and Governance (ESG) issues.
Bloomberg and Morningstar are just some of the big names that can offer ESG screening tests and scoring systems for you to weedle your way through. That all being said, they have become a source of contention over recent years as there's different views on what a sustainable company is across the industry. For example, one company may be rated as best in class by one provider who emphasizes customer service and employee welfare whereas another provider may rate it worst in class due to its lack of sustainability initiatives even though it is performing well overall.
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There is a ton of research urging us to err on the side of caution, as not all ESG data is equal, and even the best scoring stocks in terms of positive green metrics could be a poor financial choice for your portfolio if it fails other financial metrics. That's why it’s important to evaluate companies with not just their ESG scores, but also their fundamentals such as earnings, dividends and financial ratios before investing - this well-rounded approach will help ensure that investing with an eye towards sustainability is also investing wisely.
Your preferences should guide your choices
At the end of the day, the perfect sustainable investment opportunity does not exist. In order to invest sustainably, you will have to make a compromise. Eventually, you have to decide for yourself which sustainability criteria are the most important to you and how strict you want to apply them to your portfolio. Are you focussed on lowering your carbon footprint? Or would you prefer to improve labour working conditions? Perhaps none of those are at the forefront of you mind and instead it's all about ensuring you support gender equal organisations. Whatever it is, ensure that your priorities are clear so that you can build a socially conscious portfolio that meets your preferences. We'd love to all invest in companies that can ace every metric out there, but we need to anchor ourselves in reality and remind ourselves that it's almost never possible, at least for the time being.
Turn your investments green
Green investing is no longer coined as a 'hippie' practice but rather a strategic financial decision for many investors. Investing directly in green bonds and stocks of environmentally friendly companies to investing in green exchange-traded funds (ETFs) and green index funds, investors have multiple options when it comes to investing their money with an eye towards supporting the environment. The evidence states that investing wisely in green investments may not only help create positive impact on the world, but also yield returns similar to or even better than traditional asset portfolios.
An opportunity for financial and social returns
It's time to set aside that widely shared misconception when investing - there is no divide between impact investing and financial return. In fact, investing in environment-friendly initiatives has been shown to lower the risk of investment portfolios, while also strengthening a company's market position with an increasingly eco-conscious customer base. The Morgan Stanley survey conducted conducted research on the performance of nearly 11,000 mutual funds from 2004 to 2018. And what exactly did they find out, you might ask? Well the survey concluded that “there is no financial trade-off in the returns of sustainable funds compared to traditional funds”.
Investing has not only become more mainstream over the past decade, but it can also lead to greater opportunities for investors looking for profit potential as well as positive environmental progress. By capitalising on the power of investing, we can make huge strides towards a brighter future both economically and environmentally.