Socially Responsible Investing: Is It the Right Option for You?
Whenever the term ‘social responsibility’ comes to mind, most people associate it with a company or entity. However, it also applies to each of us on an individual level. Simply put, social responsibility is a moral obligation upon a corporate brand or individual to act in favor of society at large.
This means we must make decisions that will be useful for the environment and fellow citizens. Also known as sustainability, social responsibility has become the driving force behind the demands of a modern consumer. A study discovered that customers were willing to pay 9.7% more on average for sustainably produced goods.
This statistic is eye-opening because there are other pressures as well, including a high cost of living and inflationary concerns. This is precisely why brands are more dedicated than ever to Environmental, Social, and Governance (ESG) measures. Besides supporting such brands through our purchase decisions, we can also choose to take the route of sustainable or socially responsible investing.
Wondering what that is all about? In this article, we will discuss what sustainable investing is and whether it is an area you should consider exploring.
What is Sustainable Investing?
Sustainable investing is a growing field of personal finance in which an individual has the potential to earn high long-term returns by supporting socially responsible companies. Many investors view this area as a tangible way of weighing their risks and discovering new opportunities.
It’s an effective way to invest in an evolving world and participate in solving some of the major current-day challenges. By investing in companies that work towards ESG goals, individuals can earn financial returns. Investors can choose companies that share their personal values, including climate change, water contamination, environmental degradation, and so on.
Why is it a Popular Investment Option?
One main reason to consider sustainable investment options is the possibility of increased returns and reduced risk on the original investment. It is expected that sustainable companies’ shares will stay competitive in the long run. This is because these companies generally tend to be innovative and results-oriented.
Socially responsible companies may discover that they can reduce energy costs or other inputs, have a thoroughly engaged workforce, promote higher productivity, and so on. Plus, their way of conducting their business makes them less susceptible to hefty regulatory penalties or reputational damage.
Just keep in mind that the returns may vary depending on which environmental concern you choose to bank your money into. For instance - one field of growing environmental concern is that of chemical pollution. It has even been found that chemical risk is one of the greatest financial risks companies must face.
This risk is primarily driven by per- and polyfluoroalkyl substances or PFAS. These chemicals with carbon-fluorine bonds are known to be harmful, inescapable, and indefinite. Due to temperature resistance, chemical inertness, and oil/water repulsion, they have been used to manufacture Aqueous Film Forming Foam (AFFF), non-stick cookware, and stain-resistant textiles.
After decades of use, the harmful effects of these chemicals began emerging. Since firefighters were directly exposed to PFAS through AFFF, they started developing cancer of the testicles, kidneys, and bladder. We now realize the gravity of the situation as thousands of firefighters have filed the AFFF lawsuit against PFAS manufacturers like 3M and DuPont.
Not only that but TorHoerman Law shares that US municipalities also sued these companies for severe water contamination. These cases have received a global settlement but personal injury cases are awaiting trials. What’s more, the European Union (EU) has banned the production of PFAS by 2026.
Given the international attention on this issue, it is also a lucrative area of investment. Research is still ongoing for PFAS-free alternatives across industry verticals. Companies that successfully ride the waves of challenges involved in finding alternatives will become sustainable portfolio champions. Similarly, climate change concerns are an area to closely observe for a high-return sustainable portfolio.
What Makes an Investment Truly Sustainable?
If you’re new to sustainable investing, it is quite natural to find it difficult to identify sustainable investment options. In general, you must look for companies that are showcasing specific commitments in the following areas -
- Environment - Companies focusing their commitments in this area will try to reduce the waste they generate through business operations. Such brands are equally looking for ways to eliminate existing issues.
- People - These companies are dedicated to promoting a work culture that feels more like a community. Their vision would involve a diverse and inclusive workforce with good employee benefits where everyone feels appreciated and valued.
- Corporate governance - Businesses inclined towards corporate governance commitments try to make their decisions as ethical as possible. They may practice anti-corruption methods like 100% transparency and a lack of bureaucratic control.
How to Make Sustainability a Part of Your Investment Decisions
Now that you have some idea of how values-based investing works, let’s personalize it a bit. Listed below are three ways in which you can make this investment strategy a part of your portfolio -
- Actively seek and invest in brands that are making social responsibility a big part of their daily operations. This could include strategies to become more energy-efficient or encourage women in leadership roles.
- Avoid companies that are doing the opposite. In other words, steer clear of brands that have an undesirable impact on the environment or people. By limiting exposure to such brands, you can better manage/diversify risk.
- Select companies whose initiatives are focused on specific outcomes. This could include companies looking for ways to break down PFAS or those seeking new ways of waste recycling.
The Right Sustainable Investments for You
The sustainable investment market is a growing field of finance. Studies have found that it is expected to touch $38.19 trillion by 2034. The rate of growth in these 10 years is forecasted to be 19.2%. That alone is enough to suggest that a variety of funds are available across asset classes. You may be able to find sustainable investment options in the form of individual stocks, exchange-traded funds, social impact bonds, private equities, or mutual funds.
Before you choose any category or individual funds to invest, consider whether it matches your personal criteria. Ideally, the chosen fund must meet your financial goals. Also, the company must be transparent about its sustainability strategies and performance in the said area.
In the final analysis, socially responsible investing is one field that we would highly recommend for a successful personal finance journey. First-time investors can take the help of experienced agents to navigate the confusing landscape. It’s important to know exactly where you’re putting your dollars into.
Just beware of a common practice called greenwashing. It is usually carried out by certain companies or funds just to appear more eco-friendly than they actually are. Even if a fund or company seems attractive, dig deep with your research to find out if their environmental commitments are genuine. A little research and planning go a long way in creating a financially secure future.