Sustainable investing is gaining in popularity with the growing focus on environmental, social, and governance (ESG) issues. Traders and fund managers are flocking to this new asset class in droves, but not everyone understands what it is or how to get involved.
There are many potential pitfalls for investors who wish to pursue a sustainable portfolio. But done correctly, it can help you achieve your financial goals while meeting your ethical obligations – as well as introduce you to a host of new green friends!
This article will give you the inside track on sustainable investments so that you can make informed decisions about how – and indeed if – you should invest in it.
Do Your Research
Before you start investing, do your research and understand the different approaches to sustainable investing so that you can identify the one that is best suited to your needs and risk appetite.
There is a wide range of sustainable investment funds and ETFs available, and they vary greatly in what they invest in, their level of sustainability, and how they are managed. Choose a strategy that suits your risk appetite, level of conviction, and personal values.
Some funds employ actively managed strategies while others follow more passively managed indices. Research the fund managers behind each fund and assess their track record and investment approach. Also, look at the other companies that they invest in to get an idea of the level of sustainability involved.
Be Careful With Who Your Hire as Your Broker
There are many brokers offering sustainable funds and ETFs, but be careful who you hire. Brokers who understand sustainable investing are few and far between.
Some brokers only sell what is known as “environmental” or “green” funds. While these funds may adhere to some aspects of sustainable investing, they don’t necessarily follow ESG best practices. Many environmental funds still invest in fossil fuels and mining companies – practices that are often frowned upon by sustainable investors.
Make sure that your chosen broker is well versed in the sustainable investment space and has a proven track record. Also, make sure that whoever you choose can offer you a range of sustainable investment funds and ETFs that are both effective and ethically sound.
Diversify Your Investments
To properly diversify your sustainable portfolio, you need to think outside the box. Although a large number of sustainable funds are equity-based, you also need to include commodities and fixed income in your portfolio.
A healthy portfolio should consist of about 50% sustainable funds and 50% conventional funds.
Assess Your Personal Values
You can’t just jump into sustainable investing without first assessing your personal values. This will help you to determine what funds you should be investing in and what your overall strategy should be.
First, you need to decide which factors are important to you. Some investors focus on the environment, while others prioritize social or governance issues. Others choose a combination of all three.
Once you know what factors are most important to you, you can start to sift through the various sustainable funds to find the best ones for you.
Summing It Up
The world is moving toward a future that is much more eco-friendly and sustainable. With that in mind, many investors have started looking at different green investments as an alternative to other asset classes.
There are many benefits associated with sustainable investments. They typically have a lower risk profile than conventional investments, for example. But there are also some downsides as well.
Knowing which considerations to take into account before diving into this type of investment can help you get the most out of your portfolio going forward.