Sustainable investing is a growing trend among investors who want their portfolios to reflect their values. Sustainable investing is about more than companies that don’t pollute or harm the environment — it’s about investing in companies that contribute positively to society and have strong environmental practices.
But how do you create a sustainable portfolio without affecting your ROI? It’s possible, but there are some considerations you need to make.
Building A Profitable Sustainable Portfolio
1. Determine What Your Sustainable Portfolio Goals Are
The first step in building a sustainable portfolio is determining what you want from your investments. Do you want to invest in companies that are aligned with your values? Do you want to invest in companies that give back to their communities? Or do you want a strong return on investment? Deciding which goals are most important will guide your portfolio selection of stocks and funds.
2. Align Your Capital Allocation With Your Goals
Having SRI goals means not only determining your money’s best allocation but also diverting money from companies that don’t align with your goals. You can accomplish this in several ways.
- Inclusion: An inclusion approach, also referred to as positive screening, allows you to allocate investments to companies that share your values.
- Exclusion: Investors can exclude certain companies or countries from their portfolios(negative screening). There are a variety of ways to do this, such as identifying specific companies that do not respect human rights or the entire industry.
- Best in class: Based on the “best-in-class” principle, assets with the best Environment, Social, and Governance (ESG) performance are selected. No company or country is excluded as long as it has the best ESG score in its sector, which means that investing in a polluting company is still possible if it has the highest ESG score within that sector.
- Thematic investing: Thematic investing allows investors to concentrate on certain environmental, social, and governance trends, such as clean technology, healthcare, or green real estate.
- Impact investing: In impact investing, investors set explicit social and environmental objectives, measure and report them, and aim for risk-adjusted financial returns.
- ESG integration: Rather than setting criteria to exclude sectors, countries, or companies (as in exclusion), this strategy systematically considers ESG opportunities and risks. In addition, adding companies with relatively higher ESG scores is not necessary. Investors using this strategy know that ESG issues come with risks and can choose not to take them.
3. Stay Informed
The more you know about your portfolio, the more control you have over your investments. It means knowing what’s going on in your industry, which can help you determine when it’s time to get out of certain investments or when it makes sense to buy more shares.
An investor who is not only looking after their money but themselves too could be the harbinger of a new trend in investment management. With simple tips and tricks, you can build a diversified, sustainable investment portfolio that doesn’t alienate your ROI. You’ll be able to expand your portfolio and do so in a way that is consistent with your values if you use your stated objectives as a guidepost for present and future investing.
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