Investment talk is not usually a hotly debated topic but sustainable investing holds a bit more controversy than normal. The reason is, though, sustainable investments can be easily defined - the practice of considering a company or investment's impact on the environment and society. Ensuring all those investments are sustainable is not easy.
The devil is in the details as you will see as we lay them out for you here. I believe in making a profit while sticking to principles and morals. It’s totally doable. The key is knowing what to look for in your investments besides what is promoted through company PR.
It helps to know the definition of sustainability as it stands apart from the investing world. This one is one of the simplest I have found: "Meeting the needs of the present without compromising the ability of future generations to meet their own needs."
So, for example, if an investor believed that Acme Widgets were harming wetlands, that investor might find it hard to invest in their company stock. Or any fund containing Acme Widgets. Even if the returns are good, the person cares more about his grandkids’ environment.
Again this is an example and based on a simplistic idea with no nuance mentioned yet. We’re getting there though.
Profits are a Must
One detail no one should ignore is profits and return on investment. No company, no matter how idealistic or motivated to do good, will stay in business without making a profit. Though Uber has been doing it quite a while!
Most of us would agree principles are super important. And fortunately, lots of profitable companies are actively doing good in the world.
● By performing valuable services
● Providing affordable products
● Donating millions to charity
But there is something that worries many investors…
Sustainable Investments vs. Traditional Investments
Does sustainable investing show solid returns like traditional investing does? That's where research comes in and having a solid financial advisor. So you can see statistics for yourself in real time. You can then decide - not based on talking heads on TV or talk radio rants but with facts.
And this fact you will find interesting. Performance of sustainable funds has often been similar to the performance of index funds. Some research shows sustainable funds may perform better. 24 out of 26 ESG index funds (funds that consider environmental, social, and governance factors) outperformed comparable conventional funds during the first quarter of 2020, just as the market was dipping due to COVID-19.
That can be seen as a good sign. But when you dig into any of this information you’ll have a better idea of how it affects you personally. Remember, every investor is different, having different goals, lifestyles, and timelines for their retirement. And the popular “To boat or not boat.”
Careful with Statistics
Also important to keep in mind is the fact that statistics can tell different stories, depending on the storyteller and their goal. For example, some experts claim the sustainable funds and stocks that did well during the start of the pandemic were already set up for the conditions.
Tech companies had no problem with remote work keeping things running. But restaurant chains couldn’t exactly cook a Happy Meal remotely. So you have to consider all the reasons why certain investments go up or down, besides just one or two factors.
It is also crucial to compare apples to apples instead of pixels to apples.
Sustainable Investment Details can Vary
And before we get to a sneaky sustainability investment trick some corporations pull...
Another thing to note is that some funds may only include companies that are proactive in making positive impacts on the world. While other funds may welcome companies that simply avoid negative impacts. And doing no harm is doing good when you think about it.
So just be aware that there are different levels of sustainability and you could spend lots of nights and weekends dissecting a company’s history and current practices. Not to mention all the outsourcing they do. Does it make them a bad guy if one of their vendors burns a ton of diesel or has had bad press?
As a general rule, the larger an organization is, the more likely they are to be involved in something you may find harmful to the world or against your principles. Finding a perfect company to invest in is impossible because they are all run by imperfect humans. Do your homework and try not to drive yourself crazy with ideas of perfection.
Watch for Greenwashing
As for that little trick I mentioned, it’s called greenwashing. It is defined as - the practice of providing a false impression that makes a business seem more environmentally friendly than it is.
Since sustainability is seen in a positive light, some companies try to paint a pretty picture with half-truths or 10-percent truths. If only I could find some examples. I did, and they are something else!
A rug or notebook is labeled “50% more recycled content than before.” But the manufacturer only increased the recycled material from 2% to 4%. That’s one of those half-truths that most consumers and investors would never notice because… we have lives.
A trash bag is labeled “recyclable.” While that may be 100% true, guess how many landfill workers are emptying all those trash bags so they can place the bags in the recycling section. Basically none unless mandated by the municipality.
Yet, the company making those bags gets credit for showing off as a recycler. They can always say, “ We did our part making the product recyclable - we can’t follow consumers and trash collectors around.”
Greenwashing or Smart Sustainability?
This next example of greenwashing, I found confusing. The term was coined in the 1960s when hotels began posting notices to get guests to reuse towels “to save the environment.” Saving on laundry and energy bills boosted hotel profits as a result.
I don’t see this as greenwashing though. It’s not a lie or half-truth. If the idea and plan result in less energy and less wasted water, along with bigger profits, that is a win-win. A solid example of profiting while also doing good. And that makes it truly sustainable for everyone.
Green Investment Trending
As we look at trends, we can see where some sustainable investing is headed. For now at least. Worldwide, green technology investments reached $755 billion in 2021, a sharp rise from 2020. Will the trend continue for the next five years though? No one can say for sure even though things appear to be heading in that direction.
The world is a complicated volatile place - just in case you never noticed. Battles over pipelines, wars and skirmishes, cyberattacks on fuel companies. You name the random chaos and it could change the nature of environmental investing in no time.
That’s another reason to monitor your investments on a regular basis. Regular portfolio reviews help you pivot out of a trend, regardless of the type of trend, before you see unsustainable losses.
A group called The Principles for Responsible Investment went from 63 companies, with $6.5 trillion assets under management (AUM), pledged to integrate ESG into their investment decisions. As of 2020, that number had grown exponentially: to 3,038 companies with a total of $103.4 trillion AUM.in assets.
Nothing is written in stone though even when the goal is to make the world better for future generations. Why? Because one company could come in with a perfect solution to a major climate or social issue. That would make hundreds of other companies less necessary and less valuable. That’s what happened with the iPhone as it did the job of a camera, GPS, game console, etc.
People stopped buying digital cameras and stand-alone GPS devices. It’s crucial to never get locked into one way of thinking about your investments. Companies change, consumer needs change, and the world is in constant flux.
Being flexible with your portfolio keeps you from suffering big hits due to being stuck in one pattern.
Sustainable Investing Based on Promises
Lastly, another issue that investors note about sustainable investments is wading through the current company practices versus their promises for the future. Here’s what I mean…
“Walmart Stores, Inc. (WMT) has pledged to reach zero emissions by 2040, Morgan Stanley has pledged net-zero "financed emissions" by 2050, and Google has pledged to operate carbon-free by 2030.” Those are long-term goals and promises - decades away.
So what happens if Google fails in its efforts to be carbon-free? Do they promise to try harder next time? Well, that won’t make shareholders who care about the planet very happy if they have been investing in Google for eight years already.
The motivation is obviously there for companies to make promises about how they are going to clean up their pollution and be more socially responsible. It gets headlines and makes some investors more likely to buy their stock. But it’s like sports commentators making predictions before the season. Nobody remembers those wild predictions by season’s end and there are no consequences for being wrong.
Same goes for sustainable claims and predictions from various companies. Not that they are super-villains, it’s just that they can’t predict the future.
Sustainability and a Solid Retirement Plan
At the end of the day, we do the best we can. To save for retirement and provide stability for our families while also trying to invest in the right assets. If you like the idea of all-natural foods, it can be easy to invest in funds that include those. Or if you don’t want to invest in companies that have received big fines for pollution, those facts are easy to find. You can then invest accordingly.
It is my job to help folks invest in assets that help them reach their financial goals. But when it comes to picking companies that align with personal principles, that also involves a personal decision. Hopefully, this article points out all the factors that come into play with sustainable investing.
Taking care of each other and the planet is possible while making a profit and earning a great return on investments.
If you still have questions you can email me at link to email or button
Stat sources 24 out of 26 ESG index funds (funds that consider environmental, social and governance factors) outperformed comparable conventional funds during the first quarter of 2020, just as the market was dipping due to the COVID-19 pandemic. (source https://www.nerdwallet.com/article/investing/sustainable-investing)
Worldwide, green technology investments reached $755 billion in 2021, a sharp rise from 2020. https://www.bloomberg.com/news/articles/2022-01-27/energy-transition-drew-record-755-billion-of-investment-in-2021
Principles for Responsible Investment. At the time, 63 companies, with $6.5 trillion assets under management (AUM), pledged to integrate ESG into their investment decisions. As of 2020, that number had grown exponentially: to 3,038 companies with a total of $103.4 trillion AUM. https://www.forbes.com/sites/jasonwingard/2021/04/19/esg-and-the-future-of-work-3-strategies-every-leader-should-know/?sh=52b5222f43da
“Walmart Stores, Inc. (WMT) has pledged to reach zero emissions by 2040, Morgan Stanley has pledged net-zero "financed emissions" by 2050, and Google has pledged to operate carbon-free by 2030.” https://www.investopedia.com/terms/s/sustainability.asp
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.