Sustainable and impact investing has gained momentum in recent years and it shows no signs of slowing down. Also known as impact investing, socially responsible investing (SRI), or Environmental, Social, and Corporate Governance (ESG), these strategies can help investors tap into new areas of the market and align their values with their portfolios.1
In fact, a recent Investopedia survey found that 58% of readers said their interest in ESG grew in 2020, and two-thirds said they plan to invest more in companies with strong ESG profiles over the next five years.
If you’re interested in aligning your values with your investments, knowing the main considerations could help to streamline the process. Below, we’ve outlined three key steps to follow that can help you make your portfolio more sustainable.
1. Determine Your Investment Goals
Investors who know their reason for saving and investing generally have more commitment. This is particularly true for longer-term goals such as education planning or retirement. Once you know the purpose of the investment, you can determine your time horizon and how much investment risk you are willing to accept. These are foundational elements to creating a diversified asset allocation.
2. Clarify the Impact You Want to Make With Your Investments
- Understand how you want to make an impact. Are you interested in efforts to become carbon-neutral and water conservation? Or health care impact zones? Or even eliminating gambling? Sustainable and impact investments are broad-based, managed investments that address many focuses and narrow, thematic items that target specific concerns. Knowing your expectations and interest areas can help you determine the investment that you will hold for the length of your investment time horizon.
- Consider why you want to make changes to your asset mix. Are you interested in diversifying your current assets or are you hoping to replace some of your holdings with more ESG-friendly ones? Are you primarily interested in performance or access to new investments? Keep in mind that depending on your investment time horizon, changes may impact results. Also, some changes may have tax consequences that will need to be factored into the equation.
We suggest also considering the following things as you consult with your financial advisor to identify options that align with your values:
- Which ESG factors are most important to you? Are you interested in aligning your investments with certain environmental, social, or governance-focused themes?
- Do you want broad exposure to different types of investments or are you looking to invest in a particular type of fund?
- Do you know how much of your portfolio you want to allocate to these types of investments?
3. Assess Investment Opportunities
Now, it’s time to bring it all together and look at investments that align with your goals.
Today, asset managers have mutual funds, exchange-traded products, and separately managed accounts that centrally consider numerous ESG data in decisions. By integrating ESG into their established approaches, you can take advantage of investment expertise while investing in your values.
It is possible you already have ESG holdings in your portfolio. If that is the case, review the details and see if the holdings in the portfolio or fund align with your preferred focus. A few examples of what you may want to know are:
- If you’re interested in eliminating plastic, what is the company’s involvement in petrochemicals? What type of packaging do they use? What programs do they have to reuse or replace plastics?
- If corporate governance is a concern for you, do the company values within the mutual fund align with yours in areas such as employee management policies, stakeholder rights, and executive pay equity?
- If climate is a concern, what is the company’s carbon rating? How do they compare to others in their sector? What policies do they have in place to reduce or offset their carbon footprint?
Thinking through these variables will help you identify investment opportunities that align with your goals and priorities.
Work with a Financial Advisor to Create a Personalized Portfolio
An Ameriprise financial advisor will provide investments, solutions and portfolio allocation recommendations aligned to your specific goals and risk tolerance. They can also help you gain a better understanding of the performance you can expect to see from sustainable and impact investments.
The historic inflows of the past year have shown that socially responsible investing is likely here to stay. A thoughtful approach and the right investment advice can help you incorporate it into your portfolio.
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
ESG factors may cause the Fund to forgo certain investment opportunities and/or exposures to certain industries, sectors or regions.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Diversification and asset allocation do not ensure profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
© 2021 Ameriprise Financial, Inc. All rights reserved.
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
- While these terms are often used interchangeably, they do have some notable differences. Additional information on sustainable and impact investing fund flows is available via Morningstar. Morningstar, “Global Sustainable Fund Flows: Q2 2021 in Review.” Accessed August 25, 2021.