Sustainable investing allows you to invest with intention by aligning your portfolio with your principles.

Sustainable investing has had increasing momentum. According to the U.S. SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, as of year-end 2019, one out of every three dollars under professional management in the U.S. – $17.1 trillion – was managed according to sustainable investing strategies.

There are several reasons investors are drawn to sustainable investing, including personal values and the belief that sustainable investing can drive long-term growth and have a positive impact. In addition, there are several different approaches that sustainable investors can adopt when using the discipline.

“Extending the sustainability lens to an individual’s finances is something many investors may not have considered. Sustainability is something that people are increasingly considering in all aspects of their lives – the environmental impact of their car choice or the clothes purchases made based on the labor standards of manufacturing companies. So why not your finances?” said Christian Ach, an Executive Director and Financial Advisor with J.P. Morgan Wealth Management. “By better understanding clients’ goals, sustainable investing should be empowering for investors to make their money matter to meet more than just their financial goals and invest with intent.”

Learn which of the four sustainable investing approaches might work for you. Many investors use multiple approaches simultaneously.

 

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Values-based investing

Values-based investing can help you personalize your portfolio to be aligned with your values. As part of this approach, you can exclude single stocks or entire industries and sectors from your portfolio.

For example, Emily decided that she did not want to include tobacco stocks in her portfolio, so she met with an advisor to discuss options for removing these companies. Emily learned that values-based investing does not have to be an all-or-nothing approach. She decided to draw the line at companies that earn at least half of their revenue from the product she doesn’t support, although you might have a different standard you are comfortable with.

Other common negative screens include alcohol, gaming, fossil fuels, and firearms and weapons. But with values-based investing, you can also include positive screens in your portfolio to support causes you are passionate about, like clean energy or proper employer working accommodations.

ESG

Evan wants to integrate environmental, social and governance (ESG) considerations into his investment process to help achieve enhanced risk-adjusted returns over the long term. That’s why he adopted ESG into his investment strategy.

Specifically, ESG investing considers environmental, social and governance issues and risks throughout the investment process. It not only helps align your portfolio with your sustainable investing goals, but it allows you to consider factors that could affect a company’s performance. By evaluating ESG criteria alongside traditional financial considerations, you can identify opportunities to manage risk and invest in sustainably minded companies that position themselves for strong, long-term performance.

Looking at a company’s environmental impact could include evaluating the ways a company uses its resources and sets policies to protect the environment – specifically regarding waste disposal and recycling efforts, carbon emission and pollution, and water usage. Meanwhile, social issues for consideration could include a company’s policies toward health safety and quality standards, employment and pay equity, and human rights. Lastly, investors might look at a company’s governance quality by evaluating corporate policies and procedures, including board composition and diversity, executive compensation, and employee relations.

Impact investing

Impact investing provides the potential for you to generate a positive impact on society while possibly gaining a financial return. Investors who follow impact investing typically consider a company’s commitment to corporate social responsibility and its duty to positively serve society.

For example, Ian wanted an investment opportunity that allowed him to invest in companies that make a positive, measurable social or environmental impact on society. His advisor told him that impact investing could be the best fit for him since investors can choose specific industries where they want to make an impact, like education, health care, clean energy and agriculture.

Impact investments, particularly in the private markets, may be newer and less familiar, but that’s where an advisor can help. According to the Global Impact Investing Network, more than 88% of impact investors reported that their investments met or exceeded their financial expectations.1

Thematic investing

Tina wants to invest in new but lasting megatrends that are experiencing growth as a way to generate returns. That’s why she incorporated thematic investing to her portfolio’s strategy.

Thematic investing focuses on long-term trends versus specific companies or sectors. It allows you to support specific social or environmental issues within your portfolio – including climate change, urbanization and technology breakthroughs – by investing in renewable energy, health care, clean technology and more. You can even apply a gender lens to your portfolio so that it captures efforts specific to women. This approach is attractive to investors who are return focused and to investors who are passionate about a particular cause.

Due diligence

As with any investment, proper due diligence is paramount when evaluating sustainable investments. Because sustainable investing is becoming increasingly popular, some companies are trying to take advantage by greenwashing – or conveying a false impression that their products are sustainably sound.

No matter which form of sustainable investing you choose, it’s important to work with an advisor to conduct your due diligence before investing your money because some companies and investment funds “might not live up to the label or advertising,” Ach said.

Moreover, before you decide on which investment strategy to employ, figure out your investing goals – whether that be retirement, education or buying a home – and discuss those goals with your advisor. These goals, along with your personal values, could help determine which strategy is best for you.

Sustainable investing (“SI”) and investment approaches that incorporate environmental social and governance (“ESG”) objectives may include additional risks. SI strategies, including ESG SMAs, mutual funds and ETFs, may limit the types and number of investment opportunities and, as a result, could underperform other strategies that do not have an ESG or sustainable focus. Certain strategies focused on particular sectors may be more concentrated in particular industries that share common factors and can be subject to similar business risks and regulatory burdens. Investing on the basis of sustainability/ESG criteria can involve qualitative and subjective analysis and there can be no assurance that the methodology utilized, or determinations made, by the investment manager will align with the beliefs or values of the investor. Investment managers can have different approaches to ESG or sustainable investing and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. ESG or sustainable investing is not a uniformly defined concept and scores or ratings may vary across data providers that use similar or different screens based on their process for evaluating ESG characteristics. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG/ SI performance.

Any name referenced is fictional, and may not be representative of other individual experiences.

IMPORTANT INFORMATION

Investment trends may not materialize. Sustainable Investing and investment return are not always aligned, and may lose value.

Originally published by JPMorgan Chase & Co. (“JPM”).