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Traditional investing focuses on one objective: making money. Investing in sustainable and ethical companies takes that one step further. Ethical and sustainable investors look for companies that are positioned to grow and generate returns, but they also apply ethical criteria to their investments.

This type of investing is commonly referred to as ESG (Environmental, Social, and Governance) investing. Investors and fund managers seek to screen out companies that they see as actively doing harm and focus on those that are actively doing good.

Different ESG styles may use different criteria. Some may focus on avoiding companies in businesses like arms, tobacco. Others may use environmental criteria, avoiding the fossil fuel industry, mining, or other industries perceived as having a high environmental impact. Some investors seek out companies with a high degree of diversity in their boards or employment patterns or those that pay fair salaries to employees.

ESG Can Be Confusing

Sustainable and ethical investing sounds like a simple idea, but it can be complex and confusing once you actually try it. Different investors and different fund managers may have widely divergent ideas on what makes a company ethical and sustainable. Each investor has to define a balance of priorities: even an ethical investor wants to generate returns.

If you’re struggling with setting and achieving your ESG objectives, you’re not alone. Even experienced investors find the process challenging. To make it a little easier, we asked a panel of experts for their #1 piece of advice on investing in ethical and sustainable companies.

What They Said

Many of our respondents came back with variations on a few basic points.

  • Set your goals. It’s important to start by defining what ethical and sustainable investing means to you and what specific values you want to prioritize.
  • Choose your methods. ESG investors work by eliminating companies that they feel do harm (negative screening), seeking out companies that do good (positive screening), or a combination. Consider what method appeals to you.
  • Do your research. It’s not always easy to find companies that meet your criteria, and you’ll have to look beyond the superficial claims to see who’s really living up to the hype.
  • Watch out for greenwashing. Greenwashing is the practice of putting up an ethical and sustainable facade without actually making changes in the way the Company does business. You want to make sure the company is doing good, not just talking about it.
  • Don’t forget the basics. You want your portfolio to represent your values, but you also want it to make some money. Include basic financial criteria in your screeing and follow a consistent method of researching and choosing stocks.

Let’s look at the details.

Tips for Investing in Sustainable and Ethical Companies

Here’s what our panel had to say.

Jake Hill
CEO
DebtHammer

Do Your Research

The best advice I can give to people looking to invest in sustainable companies – do your research. So many companies these days are relying on this facade that they are ethical and sustainable and green, when in fact they are just as unethical as the last. Being green is trendy at the moment, and corporations are aware of how to capitalize on the trend without trying too hard.

My advice, gather research about the company but also start small. Start small with your investment and start small with the company. Invest in local businesses, as this is a sustainable way of investing that provides direct profit to the community you are a part of.

Jake Hill tackled over $100k in student loans, thousands in medical debt, and thousands more in credit card debt. Nearly a decade later and after graduating from UT Austin’s McComb’s School of Business with a Master of Science in Business Analytics, he never forgot that feeling of falling victim to a loan that was never designed to be repaid. With a stroke of luck and entrepreneurial fortitude, he founded DebtHammer to help families across the country escape the payday loan trap.

Jim Brown, CFA, MBA
Senior Portfolio Manager & Research Analyst
Buckingham Advisors

It Starts at the Top

The primary consideration when investing in sustainable and ethical companies is finding top leadership that is committed to the approach. With the added emphasis on this area over the past few years, many companies have given lip service to the notion without doing anything of substance.

By contrast, those leadership teams that genuinely commit to making a difference when it comes to sustainability and ethical treatment of stakeholders are often focused on the longer-term vision of health for the company and the surrounding community – be it local, national, or global – and thus tend to be more successful than those companies that focus on short-term swings in the bottom line. Sustainable and ethical companies are also more likely to have meaningful dialogue with shareholders and continue to develop internal plans and metrics to instigate organizational change and measure the results.

Given the costs involved in some of these efforts, however, it is common to see less progress and disclosure around these topics in smaller market cap companies. This does not mean that only large-cap companies engage in sustainability efforts or ethical improvement, but when considering an investment in a smaller company, it may require additional research or investigation

Jim Brown has been in the financial services industry for nearly 20 years and has experience in operations, trading, compliance, portfolio management, and investment research. He has a Bachelor of Science degree in Business with a major in Finance, and a Master of Business Administration degree in Operations Management from Wright State University. He also holds the Chartered Financial Analyst® (CFA®) designation.

Steve Wilson
Founder
Bankdash

Ethical Portfolios Can Perform Well

Ethical investing is a very subjective matter; one thing may be ethical for someone and unethical from another person’s perspective. So while investing, it is vital to ensure that the company you are investing in is going to have an ethical impact or not.

While there is no guarantee of how your investment performs, ethical funds have been proven to perform similarly to standard funds, if not better. Some research suggests that ethical fund performance may be more outstanding. The primary notion is that businesses that treat their people well and consider their environmental impact are more likely to be well-run and less prone to scandal, resulting in a financial benefit. Companies that adhere to ESG concerns, for example, may avoid penalties and litigation for issues like toxic waste disposal mismanagement, sexual assault, and harassment accusations, and fraudulent transactions since they may have rules in place to help prevent those issues in the first place.

You may either develop an ethical portfolio on your own by identifying and opting for certain investments and checking them over time, or you can hire someone to do it for you. When possible, most people would prefer to invest in socially responsible companies, but “when possible” means various things to different people. It takes quite a bit of time and effort to figure out how dedicated a firm is or which ethical practices they value — time you may not want to devote to stock research. Here’s when robo-advisors come in handy: Robo-advisors design and manage investment portfolios based on your risk tolerance, goals, and, in some cases, ethical choices using algorithms.

Steve Wilson is a finance expert and founder of Bankdash with over 15 years of experience in the finance industry spanning a variety of roles including working at several banks and as a financial analyst, researching and analyzing banks and financial institutions. He has spent years studying banks, credit unions, and the products and services they offer.

Taylor Murchison
SEO Growth Director
On The Map

Set Your Expectations

My number 1 advice is to set your expectations and be aware of the industry’s limitations. It has taken some time for the financial world to catch up with the concept of linking morals and money.

Ethical investing, in my opinion, is flawed. It’s similar to online dating, when the person you swiped right on and the person who shows up for the in-person date appear quite different. Individuals have told me that when they look at the holdings in a specific ESG fund, they think to themselves, “Oh my God, there’s Exxon in here.” I don’t want Exxon in this building. However, because Exxon was rated highly for its diversity and inclusion initiatives, which was one of the fund’s weighting factors, the fund came in first on that criterion.

Those who are frustrated by the limits should exercise patience. We’re still in the early stages, but there’s enough interest that I believe we’ll come up with some innovative ideas.

Taylor Murchison is a broad-spectrum digital marketer and manager; long on SEO, agency growth, analysis, product/process/procedure development, and team/contractor management.

Adam Wood
Co-Founder
RevenueGeeks

Understand Negative and Positive Screening

The most prevalent and conventional procedure employed by responsible and sustainable funds is screening. It can have both positive and bad connotations. Typically, a fund manager will screen out all companies that are judged immoral or unsustainable using a benchmark such as the FTSE All-Share or MSCI World.

The industries and companies that are screened out by negative screening vary, but the majority are related to health (alcohol or cigarettes), the environment (oil and gas or mining), and companies that have terrible labor standards. Companies are included in positive screening when they contribute positively to society or the environment, such as renewable energy or health. When it comes to picking companies, many funds use both types of screening.

Adam Wood started RevenueGeeks to offer users a really honest, committed, and helpful tool when navigating Amazon and e-commerce.

Chad Price
CEO & Founder
Life Grows Green

Start With Your Own Values

The number one piece of advice I have for people who are interested in investing in sustainable and ethical companies is to start with your own values.

I think it’s important to ask yourself what matters to you about the world. Me, for example, I care about gender equality and I’m a member of the 30% Campaign which aims to have at least 30% women on boards by 2020. So when I invest in a company, I look at their board and think ‘is that diverse enough for me? Does it reflect my values?’

If you can invest in companies that reflect your own personal values, then you are more likely to be able to spend your money – because you feel good about it. It’s easier than ever now to find out information about companies such as how much they pay their CEO or what percentage of their workforce is female at all levels.

If you’re investing through a fund manager they should be able to tell you how they support gender diversity in the companies they invest in. If they can’t, maybe they’re not the right fund manager for you.

Chad Price is an entrepreneur and business owner in multiple industries.

Sara Johansson
Customer Success Manager
Onsiter

Consider the Negative and the Positive

A negative screening technique excludes certain investing sectors if you want to align your assets with your own values. Historically, this method has been used to screen out “sin stocks” linked to activities such as drinking, smoking, or gambling. Negative screening is the cheapest and most straightforward option. All businesses are in flux and are influenced by a variety of circumstances.

Excluding equities from your portfolio decreases your opportunity set and adds the extra issue of deciding how to invest the money you don’t have. Consider positive screening if you want to incorporate long-term risks and opportunities into your analysis. This method incorporates environmental, social, and governance (ESG) considerations into investment values ahead of time. Positive screening can analyze diverse companies within a sector and select those with more progressive ESG policies and practices, rather than rejecting any one industry, sector, or company.

Unlike negative screening, this method allows investors to invest in companies or sectors that are improving their environmental, social, and governance (ESG) criteria. Both tactics can be used together. This may entail negative screening for chemical and biological weapons throughout your whole portfolio, but positive screening for the most forward-thinking enterprises in other industries. The primary purpose of this method, in my opinion, is to generate positive performance rather than to directly affect social or environmental change.

Sara Johansson is the Customer Success Manager for Onsiter, which offers solutions and tools that support businesses of all sizes in finding, hiring, and managing consultants – for free. With 6000+ consultants across several markets, the platform is for global enterprises buying consultants at scale or consulting firms trying to get a consultant on a new assignment.

Jamie Opalchuk
Founder & CEO
HostPapa

Balance Active and Passive Investing

To accomplish their aims, many investors use a combination of negative screening, positive screening, and impact investment strategies. You can use all three ways at the same time, and to varied degrees of each. It all boils down to an investor’s personal goals, how they organize their portfolios, what kind of influence they want to make, and how much money they want to make. Both active and passive management is required for the combination of techniques. The assumption behind active investing is that staying on top of a portfolio by buying and selling frequently is the best way to maximize earnings.

To compensate for the increased trading activity, management fees are often higher. Passive investing strategies, on the other hand, reduce trading activity, based on the idea that once a solid investment is made, it should be left to grow patiently. They frequently entail the purchase of low-cost vehicles such as index funds. Fortunately, both techniques have the opportunity to thrive in sustainable investing.

Active management strategies are better suited to positive ESG screening and impact investing. Managers can use these to connect with their investments and choose firms or funds with higher ESG ratings. Negative screening, on the other hand, is a strong match for passive strategies, which can match benchmark ESG indexes across asset classes and provide simple low-cost solutions. After you’ve outlined your investment objectives and considered several sustainable techniques, you might want to speak with a professional who can assist you with the next steps. Educate yourself so that you can recognize what is vital. Then try to make an impression.

Jamie Opalchuk is founder & CEO of HostPapa. HostPapa provides cloud-based web hosting with 24-7 award-winning multi-lingual customer support provided by a team of experts.

Lana Khabarova
Founder
SustainFi

Check Your Existing Holdings

The No 1 piece of advice is to check where your money is invested currently and decide if that aligns with your values. For example, if you are really concerned with climate change, you may be uncomfortable investing in oil and gas stocks, yet you probably are invested in them by default through 401(k) target-date funds.

FossilFreeFunds.org is a useful online tool to check what your 401(k) funds own. You can also check out free online ratings from agencies like MSCI and Sustainalytics that rate stocks and funds based on environmental, social, and governance (ESG) factors. Although these ratings are not perfect, they can give you something to think about by highlighting areas of concern, like poor governance or high carbon emissions.

Lana Khabarova is the founder of SustainFi, a personal finance site that connects investors who want to make an impact with their money with the right investments. She has over 10 years of investing experience at multiple investment firms and previously worked at Goldman Sachs and BlueMountain Capital, among others. Lana holds an MBA from Harvard Business School and a Philosophy, Politics, and Economics degree from Oxford. She’s been featured in the Financial Times, ImpactAlpha, NextBillion, Impakter, MSN, and Yahoo Finance.

Melanie Musson
Investing Expert
Clearsurance

Set Your Goals

Before you invest, establish your goal in the investment. For example, are you looking at your investment as a charitable gift to help a cause you believe in, or are you investing to profit but want to have a clear conscience about who’s using your funds? If your goal is charitable, and making money is a perk, you should invest in the company whose cause you most support.

Suppose your goal is to make money and enjoy the peace of mind that you’re helping the world while turning a profit. In that case, you’ll need to pay more attention to business models, established success, and outlook, and view their sustainability commitments as a secondary factor.

Melanie Musson is an investing expert with Clearsurance.com.

Nikos Melachrinos
Co-founder & CEO
Quirk

Find Funds that Fit Your Boundaries

My advice on ethical investing is to decide on your own personal boundaries and ethical values and then try to find funds that align with those.

There are funds for investors who truly care about the environment, and there are funds specifically for investors who do not want to pour their money into weapons or tobacco.

It’s also crucially important that you see how engaged the ethical funds are with their investments – Do they report back on the impact they’ve made? Do they use their shareholder influence to vote on corporate issues? Only funds that are actively engaged in shareholder activities will make a true difference.

Nikos Melachrinos is the co-founder & CEO of Quirk, the first financial platform built for Gen-Z, empowering them to build wealth early. He previously worked as an investment banker at Berenberg Bank and has a B.A. in Economics from Brown University.

Christopher Morgan
Chief Executive Officer
Credit Help Info

Do Your Research

My best piece of advice for investing in sustainable and ethical companies is to extensively research the companies you’re considering. You shouldn’t just invest in a company that you heard practices sustainability or saw an ad of. It’s highly critical that you conduct your own research. There are a few things you need to look at.

The most important of which is company philosophy. Through the company’s website and social media accounts, you can assess its values on sustainability and how they practice it. An ethical company’s website should clearly state how environmental and social factors are integrated into their everyday activities and how they promote them amongst their employees and customers.

These companies should also be ethical investors themselves. Their investments should also be in other ethical and sustainable companies or assets. You should always check if they are a signatory of the United Nations’ Principles for Responsible Investment. If they are, it’s a good sign, and you should go ahead with the investment.

Christopher Morgan is a personal finance expert based in the US, having expertise in money management, credit scores, credit cards, and credit repairs.

Carter Seuthe
CEO
Credit Summit

Watch Out for Greenwashing

The prevalence of greenwashing as a marketing tactic right now means that if you want to make sure you’re investing in a truly ethical and sustainable company, you need to be ready to do your own research. Start by searching through any published media on the company and looking at publicly-available financial information.

If you want to really do your homework, though, you may have to go deeper. Look into your investing target’s suppliers, subsidiaries, and customers. Look into their management and their labor practices. Buying a single share of the company can be a great way to get access to another layer of inside information.

Carter Seuthe is the CEO of Credit Summit, a website providing information and resources for Americans struggling to get out of debt and build credit.

Benjamin Abitz
CFP, Certified Financial Planner
Matt Logan, Inc

Create an Investment Policy Statement

The #1 rule in sustainable and ethical investing is to define exactly what that means to you first. Some people are ethically opposed to firearms and tobacco companies morally, others are more focused on a company’s environmental impact and others are more in tune with the gender and racial representation in company leadership.

By creating an investment policy statement that first sets out your principles and goals in designing a sustainable and ethical portfolio, you can then begin screening the companies that you believe in both from a mission standpoint but also from their financial fundamentals.

Benjamin Abitz is a Certified Financial Planner™ at Matt Logan Inc., specializing in Investment, Retirement, Estate and Tax Planning.

Let’s Sum That Up

If you’re considering investing in ethical and sustainable companies, you have two main options:

  1. One is to pick stocks in companies you like. That allows you to fine-tune your portfolio to your specific values, but it also requires a great deal of effort and knowledge.
  2. An easier approach is to invest in mutual funds or ETFs that use ESG principles in choosing their investments. You’ll get the advantage of having professionals doing the actual stock-picking, but you’ll need to make sure the fund manager’s priorities line up with your values. You’ll also have to compare management fees carefully!

However you decide to approach ESG investing, we hope the discussion here has given you some ideas and some options!