Sustainable Investing Primer
Once considered a niche sector for wealthy players, today sustainable investing—frequently referred to as socially responsible investing or sustainable, responsible, and impact investing (SRI)—offers ordinary investors a viable opportunity to give back to the world while potentially adding value to their portfolios.
If you want to pinpoint the moment sustainable investing became more accessible, look to when large firms began to design SRI products—and reaped the rewards of that gamble: According to the Forum for Sustainable and Responsible Investment, SRI investments under management have grown by more than 33% since 2014. Now, more than one out of every five dollars under professional management in the United States is associated with a sustainable investment.
Could SRI be a worthwhile addition to your own portfolio? Here are a few questions to ask:
What Constitutes a Sustainable Investment?
Though the exact parameters remain open to interpretation, sustainable investing is generally defined as an investment that takes environmental, social and governance factors (ESG) into account.
A few representative examples might include:
- Companies/initiatives publicly committed to reducing their carbon footprint (either by way of the products or services sold, or how business operations are conducted)
- Companies/initiatives that produce products/services intended to benefit the environment or reduce consumption
- Companies/initiatives committed to some facet of social good, including workplace and LGBTQ rights, and fair labor practices.
While the US SIF reports that 38 percent of sustainable investment dollars are driven by the United States, SRI’s popularity is undeniably global: Europe accounts for a full 58 percent of all SRI investments. Canada, Australia, New Zealand, Japan, and Asia split the remainder.
Where an Investor May Find Sustainable Investment Opportunities
Investors interested in bringing sustainable investments into their portfolios have no shortage of options: The US SIF’s data indicates there were more than 1,000 SRI opportunities in 2016, including 475 mutual funds and 413 alternative investments. SRI investment products related to climate change, clean technology, conflict risk (such as a corporation’s policies related to countries like Sudan and Iran), and human rights attracted the largest number of sustainable investment dollars last year.
Of course, the SRI a given investor chooses to buy into will often depend on the answers to a very personal, individualized set of questions: Will the SRI investment offer some potential degree of desired financial performance? Does it support advancement in social, environmental and governance practices that reflect your personal values and goals? Would exposure to SRI help diversify a portfolio and or/manage risk?
Risk and Rewards to Consider
As with any investment, past performance is no guarantee of future returns. Yet, as the US SIF Foundation’s 2016 Report on US Sustainable, Responsible and Impact Investing Trends notes, “a growing body of academic research shows a strong link between ESG [environmental, social and governance] and financial performance.”
This isn’t to say there aren’t risks—the inherent nature of sustainable investments may also mean exposure to volatility based on political, social and environmental events. As US News & World Report has reported, clean energy mutual funds generally and ETFs in particular—which declined by more than 40 percent in 2011, rebounded sharply in 2013, and fell again in 2016—may be considerably more volatile than more broadly diversified products.
Which is to say, the same rules apply to sustainable investing that apply to any investment strategy: Be diversified, informed, and have a long-term plan based on your goals, values, and risk tolerance.
This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading.
Fifth Third does not provide tax or legal advice. Please consult your tax advisor or attorney before making any decisions or taking any action based on this information.
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