When I was in graduate school living on a tight budget, I would often wistfully watch my friends purchasing organic produce, fair trade chocolate, and sustainably made clothing. I’d think to myself, “If only I had more money, I could make eco-friendly choices without breaking the bank.” At that time — over a decade ago — it seemed that choices that were good for the planet also ended up costing more, and I just didn’t have cash to spare at that time.
Years later, there are a lot more ways to take care of Mother Earth — some of which can even save you money over the long-term. Most of these choices have to do with how you spend — on the food you eat, the transportation you use, and the products you buy. But, what about the ways you save? The money you have earmarked for retirement savings or other long-term savings goals just might be an untapped source you can use to help save the earth through the practice of sustainable investing.
What is sustainable investing? According to US SIF: The Forum for Sustainable and Responsible Investment: “Sustainable investing is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.” Let’s unpack that a bit. In other words, fund managers look at the environmental (i.e., clean building, sustainable agriculture, water conservation), social (human rights, diversity, or community development), and governance (executive compensation, anti-corruption, or board diversity) impact of an investment. The goal of this form of investing is to still generate competitive financial returns — this isn’t charity— while also making an impact in these three areas. According to the US SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, as of the end of 2019, one out of every three dollars under professional management in the United States was managed according to sustainable investing strategies. That totals up to $17.1 trillion that’s benefitting more than just the individual investors — it’s working to make change on a global scale.
Tip: Investment companies use a variety of different names to denote sustainable investing such as ethical investing, green investing, impact investing, or socially responsible investing. If your investment provider doesn’t offer “sustainable investing” by name, it’s possible they may have it but call it something else. It’s important when you see these enticing titles to get to know the investment strategies behind them to ensure they align with your values.
How does it work? One of the most common approaches, ESG incorporation, involves adding an extra layer of criteria to investment analysis and portfolio construction. This can take a variety of forms, including negative screening (excluding investments that don’t fit a specific standard), positive screening (selecting investments that fit a specific positive standard), ESG integration (including ESG standards in the investment analysis process), and impact investing (seeking out investments designed to solve social or environmental issues). Another common approach involves filing shareholder resolutions (in other words, recommendations to the board of directors of a public company) and/or initiating dialogue with company leaders to encourage responsible business practices.
Tip: Another strategy is divestment (in other words, reducing or eliminating investment in a particular area). While this can be a helpful strategy in some situations, strategies such as positive screening, impact investing, and shareholder resolutions can make an enormous impact in changing behavior of large companies and may actually aid in the development of more sustainable solutions.
Is it really making an impact? While I can’t speak to the comprehensive global impact of this form of investing, I can speak to specific investments. My retirement account is invested in a fund which employs many of the strategies that I shared above, including negative screening, impact investing, and shareholder resolutions. The organization that manages my retirement account invested $20 million in an Impax environmental-focused strategy in 2016. As of 2019, this single investment has made an enormous impact: 12,500 net CO2 emissions avoided (equivalent to taking 2,720 cars off the road), 3,650 megawatt hours of renewable electricity generated (equivalent to the electric consumption of 330 households in 2019), 343 million gallons of water treated, saved, or provided (equivalent to the water consumption of 2,610 households in 2019), and 910 tons of materials recovered or waste treated (equivalent to the waste generated by 440 households in 2019).
Tip: While not every investment manager will be able to give you this level of detail about the impact a particular investment has made, it’s still appropriate to ask what the goals of these investments are and how those have been met. Though impact investing is rising in popularity, it often takes a few years to be able to achieve measurable results. Even if you can’t see the impact today, it’s possible you will in the next few years.
How can you get involved? Begin by checking to see what options are available with the places where you already invest — there may be a sustainable investment option you can use. Looking to open a new investment account that uses sustainable investment practices? Check out Nerdwallet’s list of the best ESG funds. This article looks at both the highest-rated funds as well as the lowest cost options available. As you look for a new investment manager, be sure not only to look at the impact the investment is making but also the fee structure. While it’s understandable that these funds may have higher fees than traditional investments because of the additional work required, it’s still important to weigh the cost against the impact.
Tip: Just because your retirement account doesn’t have sustainable options isn’t automatically a reason to stop investing in it, especially if doing so means you miss out on employer-matching funds that might be available to you. Instead, ask your investment manager and your employer why this option isn’t available. Even if you aren’t able to create change, it’s still important to use this investment vehicle to obtain any employer match. Beyond meeting the match, you may decide to open a retirement savings account of your own (IRA) that fits with the sustainable investment practices you have in mind.