14 Tips for Investing in Sustainable and Ethical Companies

Do Your Research

The best advice I can give to people looking to invest in sustainable companies – do your research. So many companies these days are relying on this facade that they are ethical and sustainable and green, when in fact they are just as unethical as the last. Being green is trendy at the moment, and corporations are aware of how to capitalize on the trend without trying too hard.

My advice, gather research about the company but also start small. Start small with your investment and start small with the company. Invest in local businesses, as this is a sustainable way of investing that provides direct profit to the community you are a part of.

It Starts at the Top

The primary consideration when investing in sustainable and ethical companies is finding top leadership that is committed to the approach. With the added emphasis on this area over the past few years, many companies have given lip service to the notion without doing anything of substance.

By contrast, those leadership teams that genuinely commit to making a difference when it comes to sustainability and ethical treatment of stakeholders are often focused on the longer-term vision of health for the company and the surrounding community – be it local, national, or global – and thus tend to be more successful than those companies that focus on short-term swings in the bottom line. Sustainable and ethical companies are also more likely to have meaningful dialogue with shareholders and continue to develop internal plans and metrics to instigate organizational change and measure the results.

Given the costs involved in some of these efforts, however, it is common to see less progress and disclosure around these topics in smaller market cap companies. This does not mean that only large-cap companies engage in sustainability efforts or ethical improvement, but when considering an investment in a smaller company, it may require additional research or investigation

Ethical Portfolios Can Perform Well

Ethical investing is a very subjective matter; one thing may be ethical for someone and unethical from another person’s perspective. So while investing, it is vital to ensure that the company you are investing in is going to have an ethical impact or not.

While there is no guarantee of how your investment performs, ethical funds have been proven to perform similarly to standard funds, if not better. Some research suggests that ethical fund performance may be more outstanding. The primary notion is that businesses that treat their people well and consider their environmental impact are more likely to be well-run and less prone to scandal, resulting in a financial benefit. Companies that adhere to ESG concerns, for example, may avoid penalties and litigation for issues like toxic waste disposal mismanagement, sexual assault, and harassment accusations, and fraudulent transactions since they may have rules in place to help prevent those issues in the first place.

You may either develop an ethical portfolio on your own by identifying and opting for certain investments and checking them over time, or you can hire someone to do it for you. When possible, most people would prefer to invest in socially responsible companies, but “when possible” means various things to different people. It takes quite a bit of time and effort to figure out how dedicated a firm is or which ethical practices they value — time you may not want to devote to stock research. Here’s when robo-advisors come in handy: Robo-advisors design and manage investment portfolios based on your risk tolerance, goals, and, in some cases, ethical choices using algorithms.

Set Your Expectations

My number 1 advice is to set your expectations and be aware of the industry’s limitations. It has taken some time for the financial world to catch up with the concept of linking morals and money.

Ethical investing, in my opinion, is flawed. It’s similar to online dating, when the person you swiped right on and the person who shows up for the in-person date appear quite different. Individuals have told me that when they look at the holdings in a specific ESG fund, they think to themselves, “Oh my God, there’s Exxon in here.” I don’t want Exxon in this building. However, because Exxon was rated highly for its diversity and inclusion initiatives, which was one of the fund’s weighting factors, the fund came in first on that criterion.

Those who are frustrated by the limits should exercise patience. We’re still in the early stages, but there’s enough interest that I believe we’ll come up with some innovative ideas.

Understand Negative and Positive Screening

The most prevalent and conventional procedure employed by responsible and sustainable funds is screening. It can have both positive and bad connotations. Typically, a fund manager will screen out all companies that are judged immoral or unsustainable using a benchmark such as the FTSE All-Share or MSCI World.

The industries and companies that are screened out by negative screening vary, but the majority are related to health (alcohol or cigarettes), the environment (oil and gas or mining), and companies that have terrible labor standards. Companies are included in positive screening when they contribute positively to society or the environment, such as renewable energy or health. When it comes to picking companies, many funds use both types of screening.

Start With Your Own Values

The number one piece of advice I have for people who are interested in investing in sustainable and ethical companies is to start with your own values.

I think it’s important to ask yourself what matters to you about the world. Me, for example, I care about gender equality and I’m a member of the 30% Campaign which aims to have at least 30% women on boards by 2020. So when I invest in a company, I look at their board and think ‘is that diverse enough for me? Does it reflect my values?’

If you can invest in companies that reflect your own personal values, then you are more likely to be able to spend your money – because you feel good about it. It’s easier than ever now to find out information about companies such as how much they pay their CEO or what percentage of their workforce is female at all levels.

If you’re investing through a fund manager they should be able to tell you how they support gender diversity in the companies they invest in. If they can’t, maybe they’re not the right fund manager for you.

Consider the Negative and the Positive

A negative screening technique excludes certain investing sectors if you want to align your assets with your own values. Historically, this method has been used to screen out “sin stocks” linked to activities such as drinking, smoking, or gambling. Negative screening is the cheapest and most straightforward option. All businesses are in flux and are influenced by a variety of circumstances.

Excluding equities from your portfolio decreases your opportunity set and adds the extra issue of deciding how to invest the money you don’t have. Consider positive screening if you want to incorporate long-term risks and opportunities into your analysis. This method incorporates environmental, social, and governance (ESG) considerations into investment values ahead of time. Positive screening can analyze diverse companies within a sector and select those with more progressive ESG policies and practices, rather than rejecting any one industry, sector, or company.

Unlike negative screening, this method allows investors to invest in companies or sectors that are improving their environmental, social, and governance (ESG) criteria. Both tactics can be used together. This may entail negative screening for chemical and biological weapons throughout your whole portfolio, but positive screening for the most forward-thinking enterprises in other industries. The primary purpose of this method, in my opinion, is to generate positive performance rather than to directly affect social or environmental change.

Balance Active and Passive Investing

To accomplish their aims, many investors use a combination of negative screening, positive screening, and impact investment strategies. You can use all three ways at the same time, and to varied degrees of each. It all boils down to an investor’s personal goals, how they organize their portfolios, what kind of influence they want to make, and how much money they want to make. Both active and passive management is required for the combination of techniques. The assumption behind active investing is that staying on top of a portfolio by buying and selling frequently is the best way to maximize earnings.

To compensate for the increased trading activity, management fees are often higher. Passive investing strategies, on the other hand, reduce trading activity, based on the idea that once a solid investment is made, it should be left to grow patiently. They frequently entail the purchase of low-cost vehicles such as index funds. Fortunately, both techniques have the opportunity to thrive in sustainable investing.

Active management strategies are better suited to positive ESG screening and impact investing. Managers can use these to connect with their investments and choose firms or funds with higher ESG ratings. Negative screening, on the other hand, is a strong match for passive strategies, which can match benchmark ESG indexes across asset classes and provide simple low-cost solutions. After you’ve outlined your investment objectives and considered several sustainable techniques, you might want to speak with a professional who can assist you with the next steps. Educate yourself so that you can recognize what is vital. Then try to make an impression.

Check Your Existing Holdings

The No 1 piece of advice is to check where your money is invested currently and decide if that aligns with your values. For example, if you are really concerned with climate change, you may be uncomfortable investing in oil and gas stocks, yet you probably are invested in them by default through 401(k) target-date funds.

FossilFreeFunds.org is a useful online tool to check what your 401(k) funds own. You can also check out free online ratings from agencies like MSCI and Sustainalytics that rate stocks and funds based on environmental, social, and governance (ESG) factors. Although these ratings are not perfect, they can give you something to think about by highlighting areas of concern, like poor governance or high carbon emissions.

Set Your Goals

Before you invest, establish your goal in the investment. For example, are you looking at your investment as a charitable gift to help a cause you believe in, or are you investing to profit but want to have a clear conscience about who’s using your funds? If your goal is charitable, and making money is a perk, you should invest in the company whose cause you most support.

Suppose your goal is to make money and enjoy the peace of mind that you’re helping the world while turning a profit. In that case, you’ll need to pay more attention to business models, established success, and outlook, and view their sustainability commitments as a secondary factor.

Find Funds that Fit Your Boundaries

My advice on ethical investing is to decide on your own personal boundaries and ethical values and then try to find funds that align with those.

There are funds for investors who truly care about the environment, and there are funds specifically for investors who do not want to pour their money into weapons or tobacco.

It’s also crucially important that you see how engaged the ethical funds are with their investments – Do they report back on the impact they’ve made? Do they use their shareholder influence to vote on corporate issues? Only funds that are actively engaged in shareholder activities will make a true difference.

Do Your Research

My best piece of advice for investing in sustainable and ethical companies is to extensively research the companies you’re considering. You shouldn’t just invest in a company that you heard practices sustainability or saw an ad of. It’s highly critical that you conduct your own research. There are a few things you need to look at.

The most important of which is company philosophy. Through the company’s website and social media accounts, you can assess its values on sustainability and how they practice it. An ethical company’s website should clearly state how environmental and social factors are integrated into their everyday activities and how they promote them amongst their employees and customers.

These companies should also be ethical investors themselves. Their investments should also be in other ethical and sustainable companies or assets. You should always check if they are a signatory of the United Nations’ Principles for Responsible Investment. If they are, it’s a good sign, and you should go ahead with the investment.

Watch Out for Greenwashing

The prevalence of greenwashing as a marketing tactic right now means that if you want to make sure you’re investing in a truly ethical and sustainable company, you need to be ready to do your own research. Start by searching through any published media on the company and looking at publicly-available financial information.

If you want to really do your homework, though, you may have to go deeper. Look into your investing target’s suppliers, subsidiaries, and customers. Look into their management and their labor practices. Buying a single share of the company can be a great way to get access to another layer of inside information.

Create an Investment Policy Statement

The #1 rule in sustainable and ethical investing is to define exactly what that means to you first. Some people are ethically opposed to firearms and tobacco companies morally, others are more focused on a company’s environmental impact and others are more in tune with the gender and racial representation in company leadership.

By creating an investment policy statement that first sets out your principles and goals in designing a sustainable and ethical portfolio, you can then begin screening the companies that you believe in both from a mission standpoint but also from their financial fundamentals.