Assembling a successful investment portfolio doesn’t necessarily mean setting aside your social values. Thankfully, your investment strategy and your conscience can work together.
Ethical investments, or funds that give you the opportunity to realize financial gains while supporting positive social change, have been gaining momentum. In fact, by early 2014, ethical investments reached an estimated worldwide value of $22.72 trillion. And there is little to suggest that this trend will flag any time soon.
Curious? Here are 5 things you should know if you’re planning on shifting your portfolio toward socially responsible, green or sustainable investment choices:
1. What is ethical investment?
Unlike many traditional approaches, an ethical investment strategy does not stop at a company’s bottom line – it also takes environmental, social and governance (ESG) factors into consideration.
With ethical investing, you might choose a negative screening approach to exclude sectors or companies based on poor ESG performance. Or you could use positive screening, which involves actively investing in companies with high social responsibility scores in areas that matter to you.
This concept isn’t new. The roots of ethical investing, also known as socially responsible investing (SRI), can be traced back as far as the 19th century. The modern era of SRI developed in the politically charged climate of the 1960s. In the 1990s, SRI evolved to include a more diverse set of issues, such as tobacco and climate change.
And the sustainable investment market continues to grow. According to a 2016 report by the Responsible Investment Association (RIA), assets in Canada using at least one responsible investing strategy totaled more than $1.5 trillion – a 49% increase in 2 years.
2. Why would I want an ethical investment in my portfolio?
Ethical investing allows you to invest in ways that reflect your values while advancing your financial goals.
Non-financial returns can include supporting responsible workplace policies and environmental practices.
Certain groups – millennials and women, for example – find ethical investment strategies particularly attractive. According to another 2016 RIA report, 70% of female investors consider ESG factors important when making investment decisions. And 75% of millennials agreed they would pay extra for ethical investments.
3. Will ethical investing boost my investment returns?
While there is room for debate, many investors have seen competitive returns when investing with morality in mind.
A 2015 joint Hamburg University and Deutsche Asset Management study of the relationship between ESG factors and performance in more than 2,000 academic studies published since 1970 found a positive correlation between incorporating ESG factors an strong investment performance.
A 2015 study from Morgan Stanley also has good news. Looking at performance by 10,228 open-end mutual funds and 2,874 separately managed accounts, the study concluded that sustainable investing strategies generally met and frequently outpaced the performance of traditional strategies.
Socially conscious funds can out-perform traditional funds – which means that you can do the right thing and potentially see strong investment returns.
4. Where can I find more information?
Company websites can be a good starting point, but there are many resources to help you determine if your investments actually live up to your ethical criteria.
If you’re a mutual fund investor, for example, you can look at Morningstar’s Sustainability Ratings to evaluate how well funds meet ESG factors and compare ratings for different funds.
If you’re interested in holding SRI stocks, you may want to skim the Corporate Knights Magazine’s Global 100, an annual list of the world’s 100 most sustainable corporations, which in 2017 includes Sun Life Financial for the 8th year in a row. Or consult the FTSE4Good Index for a list of ethical investing stock market indices and their performances.
5. Do ethical investment choices affect the business world?
Your investment choices make a difference in the business world. As the number of individual investors thinking about more than just financial returns grows, investment firms around the world have started taking note.
Asset management firms are introducing new products to meet the increasing demand for socially conscious investment strategies.
As of 2015, almost 1,400 asset management firms, including Sun Life Financial, had signed the United Nations’ Principles for Responsible Investment (UN PRI) agreement to uphold the ideals of socially and environmentally responsible investment with the goal of creating a sustainable financial system.
- Read more: Sun Life Financial becomes first major Canadian life insurer to officially sign on to the UN supported PRI)
Here’s the bottom line: Ethical investing could help you plan for your financial future AND support the causes you care about.