Ethically investing means matching your moral values to the investments in your portfolio. For example, you can invest in sustainable energy because it makes a positive impact. There are multiple kinds of ethical investing, not just sustainable investing. Other options include green investing, impact investing, socially responsible investing. It can also be called Environmental, Social, and Governance (ESG) investing.
You might think investing in these types of funds will get you less return than investing in traditional funds. In fact, performance is shown to be very similar. Ethical funds might even offer lower levels of risk than traditional funds because they adhere to ESG concerns. As a result, they are thoughtful about their impact. Finding companies that align with your morals may sound intimidating and time-consuming. However, there are multiple sustainable mutual funds and impact portfolios offered by Robo-advisors that make the process seamless.
How to start:
1. How involved do you want to be in the investing?
When building an ethical portfolio, you can choose to pick and monitor your investments. On the other hand, you can get help. For example, using Robo-advisors could benefit you. They use algorithms to pick and monitor your portfolio by looking at your aptitude for risk and your goals. Typically, they are less money than traditional advisors. You will have to do your research on the Robo-advisors methods for excluding, or including, certain stocks and bonds. But, make sure they apply to what you want.
2. Make a list of what is important to you.
Write down a list of attributes a company should have in order for it to be called “ethical.” Know what kinds of industries you want to avoid and which ones you want to support. This will help you narrow down investment possibilities.
3. Find the investments.
You can start investing once you’ve your priorities and you have set up a brokerage account. Limit the number of individual stocks you invest in, as it is riskier to rely on a company doing well over time. That being said, make sure to look into factors such as sustainability reports that companies release, initiatives they have started or partnered on, and the environmental impact of the company. Look at employee ratings on sites such as Indeed to get a sense of the company’s work culture.
Investing in more mutual funds than stocks is usually an easy way to make your portfolio is diverse.
If the brokerage site offers screening tools, you can use this in order to find certain funds that match your moral compass. Make sure to look at the list of companies within the fund and the expense ratio, or the fees charged on the investment per year.
4. Here are some examples of ethical funds:
iShares MSCI KLD 400 Social ETF (DSI)
This exchange-traded fund (ETF) tracks companies that have positive environmental and social attributes. It also has more than 400 holdings. With this being said, around a quarter of the portfolio is invested in big technology companies such as Facebook and Microsoft Corp.
SPDR SSGA Gender Diversity Index ETF (SHE)
This ETF tracks the performance of companies that have a lot of gender diversity. The fund has holdings in more than 170 companies such as Visa and Netflix. All of these companies boast multiple women in leadership positions.
iShares MSCI ACWI Low Carbon Target ETF (CRBN)
This fund has holdings in more than 1,400 companies and has a low expense ratio of 0.2%. Compared to other funds in the market, CRBN invests in companies with lower carbon emissions. They do have holdings in companies such as Apple and Amazon, but these companies only make up around 7% of the overall portfolio.
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
It’s similar to S&P 500, but they don’t include the companies that hold fossil fuel reserves. Since its start in 2015, the fund has made returns of about 12% per year.
Portfolio 21 Global Equity Fund Class R (PORTX)
This mutual fund is run by Trillium Asset Management and has a relatively high expense ratio of 1.33%. It consists of foreign equities and does not invest in companies with a direct interest in fossil fuel exploration or production. Also, companies in the weapons industry and companies with bad labor policies.
TIAA-CREF Social Choice Equity Fund (TICRX)
This fund tracks the performance of the Russell 3000 index but doesn’t include companies that don’t live up to its ESG standards. It has assets of $4.7 billion. There is a required minimum investment of $2,500. This fund doesn’t invest in companies in tobacco, alcohol, weapons, gambling, and nuclear power investments.