Sustainable Investing: Making a Difference with Your Dollar
When you think of the stock market, a few things probably come to mind. The ultra-wealthy, for one, not discounting the overwhelming history of insider trading, corruption and gatekeeping that’s contributed to decades of wealth disparity (though, that’s a conversation for another day). Frankly, the stock market - and investing in general - isn’t something that gives us the “warm and fuzzies.” But investments can do more than line the pockets of millionaires - they can make a difference.
Investments don’t exist simply for the benefit of your bottom line. Increasingly, investors - aka, everyday average people like us *wink wink* - are committing themselves and their finances to companies that are as dedicated to making the planet a better place as they are to their profit.
Sounds nice…. but is this even a thing, tho?
Sustainable investment strategies - which include SRI, ESG and impact investing - now make up nearly one-third of all assets under management across the United States. That’s almost $17,000,000,000,000. And no, there aren’t too many zeroes in that sentence, fam. Seven. Teen. Trillion. Dollars. Essentially, they just like regular old investments you see out there for big corporations and monopolies… but your investment is used to support a variety of issues, social, environmental and otherwise.
Okay, I’m interested. Lay it out for me?
No problem, Your Majesties!
Those terms above - SRI, ESG and impact investing - all exist under the umbrella of sustainable investing and are often used interchangeably by professionals and their clients alike. And while they all aim to accomplish similar objectives, their approaches are what vary.
Environmental, Social and Governance (ESG) Investing
ESG Investments look at the company’s environmental, social, and governance practices. While the primary goal for ESG investments remains financial returns, the companies themselves are analyzed beyond traditional risk factors (such as risk of loss and return). Rather, they’re analyzed by their ESG risks and opportunities or, rather, the money they gain to lose or gain by either investing or passing on ESG business practices.
But don’t let the fancy jargon and talk of “returns first” deter you. Some commonly considered ESG risk factors include: pollution, child or forced labor, climate change, community engagement, animal welfare and employee rights. Not too shabby, eh?
Socially Responsible Investing (SRI)
SRI investments take the idea of ESG a few steps further by allowing the investor to choose - or remove - investments based on specific ethical considerations. An investor may choose to not have their funds put into mutual funds that include tobacco or firearms manufacturers. Likewise, an investor may make it a priority for a fixed portion of their investments to be dedicated to charitable causes, or companies who place resolved dedication towards mitigating climate change.
SRI investments focus both on financial return and sustainability in (somewhat) equal measure.
Impact Investing
Impact investing helps to finance projects or programs that positively affect society at large. And, unlike SRI or ESG investments, the impact itself is the primary goal. Impact investment funds directly support a company’s mission for positive societal change. A few examples: building schools in underserved and impoverished areas or funding renewable energy. These funds report on financial performance while simultaneously working to quantify the impact itself. So, in the examples above, that could be the number of schools built, or wattage generated by solar power.
Anything else I should know?
Well, lots, frankly. But, one nugget of knowledge:
ESG and SRI Investments are traded publicly; and
Impact Investments are traded privately
This may not seem like a huge deal, but the differentiation between publicly and privately traded investments not only affects their accessibility, but their priorities. Privately traded funds can focus more specifically on their sustainability goals while simultaneously being able to offer broader transparency to their shareholders. However, they tend to be more difficult to access.
Publicly traded funds - while offering a wider array of investment vehicles and being more accessible to the public - ultimately have the responsibility of generating value for their shareholders. This mandate can often conflict with any value-based priorities.
So, what does this have to do with my personal finances? And where do I start?
Well, everything in life is interconnected in some way, right? The purchases we make, the causes we support, the people we choose to surround ourselves with… even if we aren’t witnesses to the impact itself, the impact exists. And you can always - always - make an impact, even with your long-term investment strategy.
And as to “where to start” …. that really depends on you. Values are deeply personal. A good place to start would always be, “Where are your priorities? Which values do you want to prioritize in your daily life, and within your long-term investment strategies?” Like all things personal finance, figuring out where you want to invest your dime takes some intense self-reflection and patience.
So, this Sustainable Investing thing is changing things up, huh?
Nah, Your Majesties. ESG, SRI and Impact Investing have completely changed the game when it comes to allowing your financial investments and strategies to reflect your values. And industry sentiments saying they’re only “feel good” investments with no place in most investment portfolios is challenged by their growing popularity (a 42% increase from 2018 to 2020). These types of investments aren’t only focused on the returns that you’re to receive, but on the impact this money makes on society at large. Each one has their own specific focus, but they all emphasize making a profit, while also making vital change.
So, sure. Investing has a… well… a bad name. It definitely comes from a valid place, don’t get us wrong (again - part of a completely different conversation). For plenty of first-time investors, the world of stocks, bonds, mutual funds and diversified portfolios just seems… slimy. But, it’s not all like that.
Investments aren’t just for sleazy Wall Street bankers and oil baron trillionaires. They’re for everyday, average people who want to secure their own future, as well as that of the world’s.
And your dollar?
It can make a difference.
Disclaimer: The information provided in this blog is for educational purposes only and does not constitute financial or tax advice. Reach out to The Freelance CFO team with any questions regarding specific financial concerns, or seek the services of a fiduciary.
