Sustainable investing, also known as socially responsible investing (SRI) or ESG (Environmental, Social, and Governance) investing, is a growing trend where investors aim to generate financial returns while also making a positive impact on the world. For those new to the concept, it might seem complex, but it’s an accessible and rewarding approach to building a portfolio that aligns with both your financial goals and values. This beginner’s guide to sustainable investing will help you understand the basics and show you how to get started.

1. What Is Sustainable Investing?

At its core, sustainable investing involves choosing investments that not only aim for strong financial performance but also contribute positively to society or the environment. Investors look for companies or projects that prioritize environmental sustainability, social justice, and strong governance practices.

Key principles of sustainable investing:

• Environmental: Investing in companies that address climate change, reduce pollution, or use sustainable resources.
• Social: Supporting businesses that promote diversity, fair labor practices, community development, and consumer rights.
• Governance: Focusing on companies that maintain strong ethical standards, transparency, and responsible leadership.

Tip: Sustainable investing isn’t just about avoiding companies that harm the environment or society; it’s about actively supporting those that help create positive change.

2. Why Choose Sustainable Investing?

There are several reasons why people are choosing sustainable investing, beyond just making money.

• Ethical alignment: Many investors want to align their investments with their personal values and beliefs. If you care about the environment or social justice, investing in companies that share those priorities can feel more fulfilling.
• Long-term financial performance: Many studies have shown that companies with strong environmental, social, and governance practices tend to perform well in the long run, as they’re better positioned to adapt to changing market conditions and regulations.
• Positive impact: Sustainable investing allows you to use your money to support causes you care about, whether it’s combating climate change, promoting gender equality, or supporting human rights.

Tip: Sustainable investing isn’t a “niche” market anymore. It’s gaining traction as both a way to do good and to earn financial returns, especially with millennials and socially-conscious investors.

3. Types of Sustainable Investing Strategies

There are several approaches you can take when building a sustainable investment portfolio. Understanding these strategies will help you determine which is best suited to your goals and values.

• Negative Screening: This strategy involves excluding companies or sectors from your portfolio that don’t align with your values. For example, you may avoid investing in companies that profit from tobacco, weapons, or fossil fuels.
• Positive Screening: Positive screening, on the other hand, involves actively selecting companies that contribute to positive outcomes, such as renewable energy companies or those focused on improving public health.
• ESG Integration: This strategy involves evaluating investments based on ESG factors and integrating them into the decision-making process. It’s about assessing a company’s environmental, social, and governance practices and understanding how those impact long-term performance.
• Impact Investing: Impact investing focuses on companies, projects, or funds that aim to make a measurable positive impact in addition to earning financial returns. For example, investing in a fund that provides capital to social enterprises or renewable energy projects.

Tip: The strategy you choose will depend on how active you want to be in shaping your investments and how much risk you’re willing to take.

4. How to Get Started with Sustainable Investing

Getting started with sustainable investing doesn’t have to be difficult. Here are a few steps to help you begin your journey:

1. Assess your values and goals: What social, environmental, or governance issues matter most to you? Are you passionate about climate change, human rights, or corporate transparency? Defining your values will help guide your investment choices.
2. Research sustainable investment options: You can start by looking for mutual funds or exchange-traded funds (ETFs) that focus on sustainable investing. Many of these funds will have “ESG” or “SRI” in their names, which means they are focused on sustainability. Read the fund’s prospectus to see how it aligns with your values.
3. Work with a financial advisor: If you’re unsure about how to build a sustainable portfolio or which funds to choose, consider working with a financial advisor who specializes in sustainable investing. They can help you understand the options available and create a plan tailored to your financial goals.
4. Start small and diversify: If you’re just starting, you don’t have to go all in right away. You can start small with a few sustainable stocks, ETFs, or mutual funds, and gradually build your portfolio. Don’t forget to diversify to reduce risk.

Tip: Be patient and give your sustainable investments time to grow. While they may align with your values, it’s important to treat them like any other investment, focusing on long-term goals.

5. Popular Sustainable Investment Funds and ETFs

If you’re looking for easy ways to get started with sustainable investing, consider investing in mutual funds or ETFs that focus on ESG criteria. Many well-established financial institutions now offer these types of funds, making it accessible for beginners.

• Vanguard FTSE Social Index Fund (VFTAX): This fund tracks an index of socially responsible companies and focuses on those that meet specific environmental, social, and governance criteria.
• iShares MSCI KLD 400 Social ETF (DSI): This ETF invests in companies that have high ESG scores and excludes companies involved in controversial activities like tobacco or alcohol.
• SPYG: SPDR S&P 500 Growth ETF: This ETF focuses on growth stocks with high ESG ratings and is suitable for investors looking for a diversified option in the sustainable space.

Tip: Many sustainable funds will have slightly higher fees compared to traditional funds, but these costs are often outweighed by the potential for positive social and environmental impact.

6. Understand the Risks and Limitations

Like any investment strategy, sustainable investing has its risks. While ESG-focused companies may align with your values, they may also come with a higher level of volatility or market risk, especially in emerging markets. It’s important to be realistic about the potential returns and the timeframe for your investments.

How to do it:

• Stay informed about the companies or funds you’re investing in. Follow news related to their ESG performance to make sure they’re living up to their commitments.
• Be mindful of “greenwashing,” which occurs when companies or funds falsely claim to be environmentally friendly or socially responsible. Always do your due diligence before investing.

Tip: Diversify your investments across different sectors and asset classes to reduce risk. Sustainable investing is still an evolving field, and it’s important to balance your portfolio for long-term growth.

7. Track and Evaluate Your Investments

Once you’ve started investing sustainably, it’s important to track your portfolio and evaluate whether it continues to align with your values and financial goals. Revisit your investments regularly to assess their performance and ensure they meet both your financial and ethical criteria.

How to do it:

• Use online tools or apps to monitor your investments. Many platforms offer insights into how well your portfolio is doing and provide ESG ratings for individual stocks or funds.
• Reassess your financial goals at least once a year and adjust your portfolio as needed. If you feel your values have shifted, update your investments accordingly.

Tip: Keep in mind that sustainable investing is a long-term approach. Don’t panic over short-term market fluctuations, and stay focused on your long-term goals.

Final Thoughts

Sustainable investing offers a unique opportunity to create positive change in the world while building financial security. By focusing on companies and funds that prioritize environmental sustainability, social responsibility, and good governance, you can invest in a future that aligns with your values. Whether you’re just starting or already have an investment portfolio, it’s never too late to incorporate sustainability into your financial strategy. Start small, do your research, and let your money work for both you and the planet.