Today, more than ever before, people see the link between their money and their morals – and are seeking to do something about it.
They drive their carpool in a hybrid.
They recycle their bottles and their bags.
Their milk is organic, their coffee is fair trade, their beef is grass-fed, and their eggs are cage-free.
They buy local and American and from companies that treat their workers fairly and act with a conscience.
But so often they end up asking – “Why in the world am I investing in ways that don’t live up to those same values?”
That’s why funds in “sustainable investment” strategies grew by almost 80% in just two years – from $3.7 trillion in 2012 to $6.6 trillion in 2014.
However, it’s important to bear in mind that not all sustainable investments are created equal.
While they may have the best intentions, their approaches can be very different when it comes to their financial returns. That’s why it’s helpful to understand the different types of investments and their likely returns so that you can make the best choice for yourself.
Socially responsible investing
Socially Responsible Investing (SRI) is a term that you might have seen thrown around a lot lately – on the news, on social media, or even in conversations with friends and family.
But what does it mean? And more importantly, how can you make sure that your money is invested in a way that aligns with your personal values?
Socially Responsible Investing is a type of investing that takes into account the social and environmental impact of your investments.
It has been gaining popularity in recent years as more people want to make sure their money isn’t being used to fund projects or practices that they consider unethical.
The basic idea behind SRI is simple: you identify what kind of organizations you do and do not want to support with your money. Common investments to avoid include those associated with the alcohol, tobacco, firearm, gambling, and fossil fuel industries.
This choice could be based on their environmental impact, social harm, or simply a difference in the underlying values or philosophy.
SRI is the forerunner to sustainable investing. It has been in use since the 1960s and still accounts for about 60% of sustainable investments. Its general approach can be summed up in the Hippocratic Oath: “Do No Harm.”
Examples of successful SRI investments
One of the most successful SRI investments is the Clean Water Fund, which provides clean water and sanitation systems to people around the world.
This type of project has been able to raise millions for their work because it aligns with many investors’ values.
Another great example is the Tides Foundation, which focuses on a variety of social issues like climate change, human rights, and animal welfare. They have been around for over 40 years and have invested over $850 million in various projects.
There are also several socially responsible ETFs (exchange-traded funds) that you can explore if you’re looking for more specific options. Some examples include:
These funds invest in companies that meet certain criteria related to social responsibility, so they can be a great way to get started with SRI investing.
How to get started with SRI investing
If you’re interested in getting started with SRI, there are a few things to keep in mind:
Do your research
Make sure you understand what each fund or strategy is trying to achieve and how it aligns with your personal values.
If you’re not used to investing, it may be best to start slowly until you get more comfortable. Try allocating just a small portion of your portfolio to SRI investments and see how it goes.
Look for funds that match your interests
As we mentioned earlier, there are now many different types of SRI funds available, so find one that fits with the kind of social issues you care about.
Once you’ve done this, you can begin to research which funds or strategies might be right for you.
Impact investing moves beyond “don’t do bad” to “do good.” The primary goal of impact investing is to make a positive difference in the world.
Examples of this approach include green bonds to help communities battle the impact of climate change, microfinance investments offering small loans to help people in poverty, or conservation notes which buy up threatened ecosystems to protect them from destruction.
“High Road” investing
In recent years, a new kind of sustainable investing has taken shape.
This strategy uses integrated reporting to see the material impact of a company’s environmental, social, and governance (ESG) policies on its bottom line.
Here at Aspiration, we call businesses that take proactive steps to do the right – and smart – thing in these areas “High Road Companies”.
This approach to investing marries value and values. Value investing is most publicly associated with the approach of Warren Buffet and seeks out investments in companies that are worth more than they are currently valued.
While much of the investing world looks for short-term gains, value investors look at the fundamentals of a business.
From this perspective, focusing on environmental, social, and governance questions is not just about feeling good regarding your investment – it is about making investments that might perform better.
A company is arguably not a good long-term investment if it does not care for the well-being of its employees or exhausts the finite natural resources it needs to operate. These investments can risk boycotts, lawsuits, fines, and a loss of respect in the eyes of the public.
Considering the long-term effects of investments helps to reduce risk and take advantage of long-term opportunities while prioritizing environmental and societal concerns.
That is why studies have shown High Road Businesses outperform similar Low Road Businesses in the stock market and when it comes to profits.
Why don’t more people invest in High Road companies?
If investing in High Road Companies lets you do well and do good at the same time, why is it not more common?
It’s a good question.
One reason is that it takes deep and extensive research to look at the internal practices of thousands of companies. Even more crucially, it’s an unfortunate truth that much of the investing world operates not on the principle of “make money and make a difference”, but on that of “get mine and get out.”
In 2013, the McKinsey consulting group conducted a study of over 1,000 top corporate executives and board members from around the world. They found that 63 percent of this group reported that the pressure to demonstrate short-term results had gone up over the previous five years. And 79 percent said they were especially pressured to show performance over a timespan of two years or less.
That pressure to maximize earnings in the short term often leads to cut corners, stop-gap measures, and a lack of investment in workers, innovation, and new ideas. It has the potential to create a vicious cycle in which companies chase ever-decreasing profits and performance.
Investing in High Road Companies can help to create a virtuous cycle: as these companies do better, they gain more investments, and they then have an incentive to continue doing better, generate better returns, and gain even more investments.
There are no guarantees in any investment, but investing in High Road Companies is designed to help you create value in your portfolio while living up to the values that matter to you.
Ready to transform your financial future?
Sustainable investments come in all forms, but they all have the same goal – to protect our planet while providing healthy financial returns.
If you need help or advice on making your financial plans more environmentally sustainable, then we at Aspiration are here to help.
Are you ready to make a difference with your money? Start investing in a sustainable future today!