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How to Create a Sustainable Investment Portfolio

What does a sustainable investment portfolio look like? What factors should investors look for? Learn what a strong investment portfolio looks like.
sustainable investments

Investing today is no longer just about seeking financial independence, funding your retirement, or supplementing your income. Increasingly, investors are looking to support companies that demonstrate a commitment to social and environmental responsibility.

Investing in a sustainable investment portfolio is not only a way to grow your wealth, but it also provides an opportunity to contribute to a better, more sustainable future. This type of investment portfolio offers this opportunity by focusing on environmental, social, and governance (ESG) factors and includes investing in companies that prioritize sustainability.

What is Sustainable Investment?

A sustainable investment portfolio is a collection of investments that consider how a corporation manages the ESG criteria of environmental stewardship, social responsibility, and ethical corporate governance. The goal of sustainable investments is to have a positive impact while also creating avenues of sustainable funds and financial returns.

Environmental Factors in Sustainable Investment

Environmental factors that adhere to sustainability include how a company uses resources in the course of conducting business. They prioritize practices that are aimed at mitigating the effects of climate change and focus on implementing those that protect the environment.

That includes:

  • Reducing their carbon footprint by getting rid of greenhouse gas emissions
  • Implementing intelligent waste management protocols
  • Becoming more energy efficient.

For example, companies can use green technology that eliminates reliance on fossil fuels and build with eco-friendly materials.

Social Factors Used to Evaluate Corporations

Companies that care about human rights, including those of their employees, are preferable to those who hold to old standards that seem to prefer profits over people. Such companies care about social problems, adhere to high labor standards, and are cognizant of their impact on the community.

What’s more, they demonstrate this through their actions as well as the policies and causes they support.

How Governance Shapes Corporate Sustainability

Governance covers how these factors are implemented, but it goes further than that to include how they structure employee pay and benefits. Executive compensation and perks are more balanced and aligned with performance. Board diversity is considered important, and shareholder rights factor into decision-making.

Investing in a sustainable portfolio involves selecting companies and funds that prioritize these factors and contribute to sustainability. However, these priorities should become part of long-term planning rather than short-term policies that jump on a trend or pay lip service to sustainability issues.

Why Sustainability Matters in the Current Investment Landscape

Sustainability is essential in the current investment landscape because it helps investors align their money with their values. Many investors today are concerned about the impact of climate change and social issues on their communities. They want to support companies who actively address these issues through their policies and how they function.

By building a sustainable investment portfolio, you demonstrate a commitment to supporting companies that are working towards a better future. You also incentivize corporations to follow suit and become part of the solution rather than contributing to the problem.

In addition, sustainable investments may provide better long-term returns as companies that prioritize sustainability are better positioned for long-term success.

For example, companies that invest in renewable energy take a proactive stance when it comes to other factors that impact the environment and the people who live in it.

When dinosaur companies that prioritize profit at the expense of the planet and its inhabitants disappear, sustainable businesses will flourish.

Now that you know the “why”, the “how” of building an ethical, environmentally sustainable investment portfolio is as easy as 1-2-3!

3 Steps to Building a Sustainable Investment Portfolio

Creating a sustainable investment portfolio involves selecting sustainable investments, such as renewable energy and green technology, and identifying companies that are actively working towards sustainability.

Here are some tips for building a sustainable investment portfolio:

1. Select environmentally and socially responsible investment funds. Many investment firms offer funds that prioritize sustainability. These funds go toward supporting companies that have high ESG ratings and may have strict sustainability criteria.

2. Identify companies that are working towards sustainability. You should always carefully research any investment opportunity before committing your money. However, this research includes identifying companies that prioritize sustainability and have strong ESG ratings. Look for companies that have codified guidelines and specific sustainability goals, such as reducing carbon emissions by a specified amount and within a set time frame or increasing diversity on their board.

3. Consider different types of sustainable investments. Diversification is always important when it comes to investing. In addition to a mix of high-yield and low-risk or long- and short-term investments, your collection of stocks, bonds, and alternative investments should include viable renewable energy projects and sustainable real estate holdings.

Such investments will only grow more profitable in the future.

Benefits and Risks of Sustainable or ESG Investing

Like any investment opportunity, sustainable investments come with certain risks and rewards. Before taking any action, investigate the potential of investment opportunities by:

  • Deciding what sustainability means to you
  • Understanding your current investment portfolio
  • Knowing your sustainable investment options
  • Making a strategic plan before transitioning your portfolio

That being said, here are some potential pros and cons of sustainable investments:

  • Risk #1: Sustainable investments may be more volatile than traditional investments
  • Risk #2: Some sustainable investments, such as renewable energy projects, may have higher upfront costs and longer payback periods
  • Risk #3: Unforeseen factors, such as social unrest or economic calamity, can influence portfolio stability

Now that you know the risks, here are some benefits you gain from sustainable investment:

  • Reward #1: Sustainable investments may provide better long-term returns
  • Reward #2: Companies that prioritize sustainability may be better positioned for long-term success
  • Reward #3: Sustainable investments may benefit from increased demand as investors increasingly prioritize sustainability
  • Reward #4: Sustainable companies are in a better position to help you meet long-term investment goals
  • Reward #5: Investing in sustainability gives back to the community in a meaningful way
  • Reward #6: Companies with strong sustainability standards and ethics are more focused and stable
  • Reward #7: Such investments provide an opportunity to promote social justice and mitigate climate change
  • Rewards #8: Strong ESG protocols also limit corporate risk exposure.

As you can see, the benefits outweigh the potential risks.

Still, investing is never a sure proposition. In volatile markets, anything can happen. That’s why it’s important to do your homework and seek financial advice from professionals who are aligned with your values and investment goals.

Final Thoughts

As you can see, concepts like green investing and profitability are not mutually exclusive. In fact, as the rigors and risks of climate change become more apparent in the real world, investing in companies that prioritize sustainability and social responsibility may become the safest place to put your hard-earned money.

If you’d like to learn more about populating your investment portfolio with ethical, environmentally responsible companies, arrange a consultation with a sustainability advisor about impact investing today. Walter Schindler is also available for public speaking engagements about environmental issues.

May 22, 2023

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