Sustainable investments provide a path to help make the world better as you're investing for retirement.
This type of investment comes with its own pros, cons and considerations. Here's how you can prepare financially for retirement and support the causes near and dear to your heart at the same time.
What Is Sustainable Investing?
Sustainable investing is an investment strategy that includes selecting investments based on factors such as their environmental, social, and governance (ESG) impact and values.
These values may take many forms, such as mitigating climate change, increasing gender and racial equity, directing endowments to local areas, or even enhancing the power of stakeholders and shareholders in guiding corporate action. When you invest sustainably, your investment choices can have an impact.
According to CNBC, ESG investing could see $1 trillion invested by 2030. In fact, in Q1 of 2021, over $21 billion in investments flowed to ESG funds.
How Do Management Costs and Returns Compare?
Whether you choose to invest in stocks, mutual funds, cash, alternative investments or exchange traded funds (ETFs), investing sustainably means your investment dollars support socially responsible ESG practices. Does that mean you'll need to give up returns or absorb higher management costs? Not necessarily.
When ESG investments first emerged, critics noted the potentially high management costs associated with selecting and monitoring companies that meet the criteria for sustainability. However, that appears to be changing. Recent reports show that the costs and returns of these investments compare favorably with other investments.
Likewise, management fees for ESG funds are now more often comparable to other investments, according to research from the U.S. Forum for Sustainable and Responsible Investment. They also report that sustainable ESG investments appear to offer more stable returns during volatile market periods.
In recent years, companies with higher ESG scores have even slightly outperformed their peer companies. Sustainable ETFs also show promising performance: A recent Forbes Advisor post highlighted seven ESG funds with five-year returns in the double digits, coupled with low management expense ratios (all below 1.3%).
Pros and Cons of Sustainable Investments
As with all investments for retirement, it's important to consider the pros and cons of adding sustainable investments to your portfolio.
Some of the benefits of this type of investment strategy include that it:
- Allows you to invest according to your own values and principals.
- Rewards companies following responsible ESG principals.
- Offers competitive returns.
On the other hand, some of the potential drawbacks include that:
- The criteria for a sustainable investment isn't always clearly defined.
- A strict sustainable investing strategy can make it difficult to diversify your portfolio for risk reduction.
- Depending on the type of investment, management costs could be higher than those of other investments in the same category.
- Investors won't necessarily see the direct impact of their choice, as it could take many years to show a result.
How to Get Started With Sustainable Investing for Retirement
The internet makes it easy to learn more about sustainable investing and get started. If you enjoy investment research, consider looking online for lists of the best ESG investments according to category. You could also search for companies that make the list of Socially Responsible Investments (SRI). If you're financially savvy, you might opt to do your own research and investigate the options available to you.
Also talk to your financial advisor about which ESG investments may be a good fit for your portfolio. Investments should fit your investor profile, including your risk tolerance and time horizon. Your advisor will likely have recommendations on sustainable investments that best suit your financial goals.
Sustainable investments can help amplify your voice on the issues that matter most to you and your family. Investments directed toward impact may make a real impact on the lives of future generations, all while laying the groundwork for your golden years.