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Differences & Key Factors to Consider

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One of the biggest modern investment trends is ethical and sustainable investing. Ethical and sustainable investments can offer feel-good qualities. And they can also lead to great results for your portfolio. Continue reading to learn about sustainable investing and ethical investing and whether or not they make sense for your investment strategy.

Sustainable Investing

The word “sustainable” is often used when discussing the environment and energy resources. Here’s a look at what sustainable means for your portfolio.

What Is Sustainable Investing?

Sustainable investing is a strategy where investments are concentrated in companies with sustainable business practices. While the environment is a part of sustainable investing, there is more to it than recycling and cutting climate change-inducing emissions.

A popular term that encompasses sustainable investing is ESG, an acronym for “environmental, social and governance.” Companies that employ an ESG focus look at sustainability from all sides, including the environment, diversity and inclusion, positive social impact, and strong corporate governance practices.

Guidelines for Evaluating Potential ESG Investments

  • Environmental: Environmental sustainability is something many of us are familiar with. Companies with strong environmental policies may reduce and eliminate various types of waste while reducing their reliance on nonrenewable energy sources.
  • Social: Businesses making good efforts here are working to bring about gender and racial equality in their workplace and for their customers and communities. Many socially responsible companies take it a step further by getting involved in communities, encouraging volunteerism among workers, and donating to important social causes.
  • Governance: Corporate governance looks at how the company is led and managed behind the scenes. Strong corporate governance policies dictate how the board and executives work together, what company leaders are paid and how company finances are overseen and audited, among other things.

When you understand how these corporate functions come together, it’s no surprise to find out that companies with strong ESG policies often outperform their peers. A Morgan Stanley study in 2019 found that ESG funds perform similarly well to other funds and are exposed to less risk. Other studies have found that ESG investments may perform better than a typical portfolio with no sustainability considerations.

The word “sustainable” means an ability to exist continually. Companies focused on long-term factors may be on to something when it comes to long-term financial performance.

Rather than trying to find individual companies to invest in, you can buy a fund and have someone else choose sustainable or ESG investments for you.

Sustainable Investment Funds

Due to their popularity, there is a growing number of sustainable investment funds. When you have a brokerage account with free ETF trades and a long list of supported no-load, no-transaction-fee mutual funds, you may have many options for sustainable investing. Here are several large ESG funds with more than $1 billion in assets:

Fund Name Fund Type Assets ($billion) Expense Ratio
iShares ESG Aware MSCI USA ETF 12.7 0.15%
TIAA-CREF Social Choice Equity Fund Mutual Fund 6.0 0.15%
iShares ESG Aware MSCI EM ETF 5.5 0.25%
iShares ESG Aware MSCI EAFE ETF 3.7 0.20%
Xtrackers MSCI USA ESG Leaders Equity ETF 2.7 0.10%
iShares ESG MSCI USA Leaders ETF 2.7 0.10%
Vanguard ESG U.S. Stock ETF 2.6 0.10%
iShares MSCI USA ESG Select ETF 1.8 0.25%
Neuberger Berman Sustainable Equity Fund Mutual Fund 1.7 0.99%
Vanguard ESG International Stock ETF 1.3 0.11%

This list does not constitute a recommendation.
Data current as of Dec. 8, 2020.

Sustainable Robo Advisors and Managed Portfolios

If you want to invest in sustainable companies or portfolios, you can easily do so through a robo advisor. Here are some of the top robo advisors we recommend for ESG investing:

  • Betterment: Betterment offers a broad-based portfolio for socially responsible investing (SRI), its Broad Impact portfolio. And it offers two other portfolios. Its Climate Impact portfolio focuses on mitigating climate change by investing in companies that reduce their carbon footprint, among other things. The Social Impact portfolio expands the Broad Impact portfolio by also including stocks of companies focused on diversity in the U.S. Learn more about Betterment on their website.
  • Personal Capital: Personal Capital’s wealth management service offers the option to choose its Socially Responsible Personal Strategy. This portfolio plan excludes industries some may see as undesirable while heavily weighting specific ESG stocks. And you can sign up for Personal Capital to review your current portfolio with its free investment tools even if you don’t want the company to manage your investments.  Learn more about Personal Capital on their website.
  • Wealthsimple: Wealthsimple offers the ability to weigh your portfolio more heavily in ESG-friendly ETFs.
  • Ellevest: Ellevest weights portfolios more heavily in ESG and “impact” investing funds when you choose the Ellevest Impact plan. Learn more about Ellevest on their website.

Read More: Leading Robo Advisors for Socially Responsible Investing

Ethical Investing

Ethical investingThere’s lots of overlap between sustainable and ethical investing. But they are not the same thing. In this section, we dive deeper into ethical investing and how it may fit into your portfolio plans.

What Is Ethical Investing?

While ESG investing definitions are widely accepted, ethical investing is far more personal. Ethical investing is an investment strategy where you choose stocks and funds based on your own personal values.

When choosing ethical investments, investors take into account religious, cultural, moral, and social beliefs. That could mean avoiding specific investment categories such as alcohol, gambling, or firearms. It could also mean picking specific stocks or funds focused on certain issues like green energy or companies that have taken a position on a certain social issue.

Because you choose your own ethics, your ethical portfolio is unique compared to anyone else’s. Weapons manufacturers for example may be unethical to one investor or completely ethical to another. That means you may have to do more research to find the right ethical investments for your goals.

Types of Ethical Investment

Here are several examples of the types of ethical investments you can find:

  • Single stocks: One method to have granular control over your ethical investment portfolio is picking single stocks. Unlike broad index funds or mutual funds, single stock investments give you ultimate control over your funds.
  • SRI Funds: This is a category of mutual funds and ETFs that avoid commonly undesirable industries while focusing heavily on investments that align with the fund’s specific requirements.
  • ESG Funds: As we discussed above, ESG investing has a big overlap with ethical investing. Investments in some ESG funds could meet your ethical investment goals.

Best Ethical Investment Funds

It’s up to you to evaluate your investment funds or hire a trusted financial advisor to do so for you. Here are examples of large investment funds in the SRI category:

Fund Name Fund Type Assets ($billion) Expense Ratio
Vanguard FTSE Social Index Fund Admiral Shares Mutual Fund 10.1 0.14%
Calvert US Large Cap Core Responsible Index Fund Mutual Fund 3.3 0.30%

This list does not constitute a recommendation.
Data current as of Dec. 8, 2020.

Ethical Investment Screening

To find ethical investments, you may want to use online stock screeners alongside annual reports. Basic screeners can help you sort through funds using common investment metrics. But to screen for ethical investments, you may need to use a more advanced stock screener or fund screener.

Learn more: How to Use Advanced Stock Screeners

What Is Impact Investing?

Impact investing also overlaps with SRI and ethical investing. But it has its own unique twist. With impact investing, investors put their dollars into investments that will actively help in an area they care about. That makes impact investing most common for investors with a high net worth.

For example, an investor who can put $100,000 into a high-risk venture may invest in a startup working to build sustainable water infrastructure in Africa. Or they could make an angel investment that kick starts a new project around clean energy. Or to expand internet access for low-income youth.

The Gates Foundation, run by Bill and Melinda Gates and Warren Buffett, is an example of an impact investing organization. While most of us don’t have the billions that Gates has to completely eradicate a disease, that doesn’t mean we can’t make a difference. If you’re interested in impact investing, look for companies and funds that are making a difference in areas you care about.

Feel Good About Where You Invest

There’s no rule that says you can’t feel good about investment and make money at the same time.

If you want to invest in companies that focus on things like the environment and social justice, look into sustainable investing. If you have specific industries you don’t want to support, then ethical investing might be for you. Or if you want to help make a difference in specific areas, look into impact investing.

When following sustainable, ethical, or impact investing strategies, you can put your dollars to work in a cause you care about while hopefully adding to your investment profits.

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