SUSTAINABLE INVESTING is one of those terms that looking up in the dictionary only leads to needing to look up even more terms in the dictionary. What should be a straightforward process is actually the fork in a trail that branches in a half dozen directions. Because there is no one way to invest sustainably; there are four.
“Sustainable investing is an umbrella term encompassing SRI, ESG, thematic investing if based on environmental or social values, and impact investing,” says Sonya Dreizler, a consultant to financial services firms about impact investing and ESG at Solutions with Sonya. “All screen for risk and create competitive returns but with different approaches.”
To determine the right sustainable investing approach for you, think about what you’re trying to accomplish with your investments, says Anita Baldwin, head of research and sustainable investing for Hartford Funds. She would also add thematic investing to the group gathered under the sustainable umbrella. Do you want to divest the bad by selling certain stocks or industries from your portfolio? (SRI) Or are you more interested in buycotting by investing in companies doing good? (Impact investing)
Before You Start Sustainable Investing
Whichever form of sustainable investing you use, “it’s important to look past the name of the fund or portfolio to understand the underlying holdings as well as the intentions of the portfolio manager,” Dreizler says.
The best way to do this is by looking at the asset manager’s history, Baldwin says. There’s a difference between just calling yourself sustainable and actually putting resources toward it and the truth is in the track record. She recommends using asset managers who have a team of analysts dedicated to sustainable investing research and practices.
And if you care about not giving up returns while investing sustainably, look for a fund that’s benchmarked to a broad-based index, Baldwin says. This shows the fund manager is attempting to provide market-like or possibly better-than-market returns. “Sustainable investing benchmarks, like an environmental index, can be useful as a measure of comparison, but they can’t speak to if a fund manager has an eye on the market at large as well,” she says.