As the demand for sustainable investments continues to grow, more and more investors are looking to integrate their principles with their portfolios. Coinciding with this rising interest in SRI is an increased number of opportunities to invest in trustworthy companies that make impactful products.
These types of investments can offer investors a way to align their values with their investment portfolio while also earning strong returns. Understanding how to manage a sustainable portfolio requires understanding what makes a company qualify as being responsibly sourced and which investments are best for you.
Here are some helpful tips on how to get started managing a sustainable portfolio.
Pick a Strategy and Be Disciplined
The first step in managing a sustainable portfolio is deciding which strategy will work best for you. There are a few different ways to approach sustainable investing, but the most common methods include impact investing, ESG integration, and negative screening.
Impact investing is investing in for-profit companies that promise to create positive outcomes for under-resourced sectors. This is the most common form of socially responsible investing with the most extended history.
ESG integration is screening a company’s financials based on environmental, social, and governance factors. Negative screening is the opposite of ESG integration in that it involves excluding companies whose activities are deemed harmful.
Whichever strategy you choose, make sure you are committed to it for the long haul. A long-term outlook will allow you to make informed decisions without letting emotion cloud your judgement.
Research Your Investments Thoroughly
The next step in managing a sustainable portfolio is thoroughly researching each potential investment. This will allow you to understand the company’s finances, operational plans, environmental impact, and social responsibility initiatives.
Conducting in-depth research will allow you to identify which investments best align with your values. This is particularly important when it comes to companies listed as sustainable but have not been formally recognized as such, as they are less likely to be included in major indices.
A strong understanding of each company’s social impact will also allow you to identify ways to exert pressure or utilize your position as an investor to further the company’s social cause. For example, you may participate in your company’s annual meeting or sign a shareholder pledge, which empowers you to hold your company accountable for social and environmental issues.
Knowing how to research your investments thoroughly will help ensure they are socially responsible.
Don’t Be Afraid To Deviate From Your Benchmark
Many investors who manage a socially responsible portfolio choose to mix their benchmarks. This means they may hold less stocks than they would otherwise and instead choose to invest in bonds, real estate, or other fixed-income assets.
There are a couple of reasons investors may choose this, such as overall portfolio diversification or an investor’s risk tolerance. If you choose to deviate from your benchmark, make sure you understand the risks of each investment you choose and monitor them carefully.
You may also want to consult a financial advisor to help navigate these options. It’s important to remember that some companies that are considered socially responsible might not perform as well as others. This is largely because many socially responsible companies are smaller, lesser-known enterprises that don’t generate significant revenue. Because of this, it’s important to ensure you have a balanced portfolio.
Watch Out for Red Flags
There are some red flags that may indicate a company is not as responsible as it claims to be. This can be especially true for smaller, more obscure companies. Some warning signs include a lack of transparency, the absence of a robust environmental or social policy, and an inability to generate a consistent profit.
If you come across a company whose social impact is unclear or one that doesn’t appear to be making a positive difference in the world, that may be a red flag. Some companies may be more focused on their profit margin than their social impact, so it’s important to ensure you aren’t being duped by misleading marketing claims.
The Bottom Line
Sustainable investing is a long-term strategy, so don’t expect instant or dramatic returns. Successful socially responsible investing is often a slow-and-steady process that takes years to fully come to fruition.
With patience and diligence, you can manage a socially responsible portfolio that meets your needs and moves the needle toward a more sustainable world.
