Are you interested in investing in mutual funds, but don't know where to start? Are you considering investing in companies that align with your personal principles? A new strategy for investing you may want to consider is sustainable investing.
This strategy, which helps people who care about the environment invest in it, has grown significantly in the past few years. Bill and Melinda Gates recently helped to launch a mutual fund, called the Breakthrough Energy Ventures fund, which invests in technologies to reduce greenhouse gas emissions. By investing in this fund, you would be investing in this goal as well.
Here is a closer look at what sustainable investing is, along with some ideas for how to get started.
What is sustainable investing?
Sustainable investing is known by many names—some people call it socially responsible, ethical, impact, or principles-based investing. According to Morgan Stanley Capital International (MSCI), a provider of investment decision tools, this approach looks at a company's environmental, social, and corporate governance (known as ESG) practices as well as its overall investment decision-making process.
This approach isn't new, but it has evolved over the years to what it is today. Investors began by avoiding certain investments, such as tobacco, firearms, alcohol, and casinos, and now sustainable investing has a more holistic approach based on the environmental, social, and corporate governance factors.
- Environmental impact – Environmentally friendly investments can include companies that produce renewable and sustainable energy, enhance energy efficiency, source raw materials using eco-safe methods, use little to no hazardous chemicals in their production process, limit waste, and prioritize recycling. There are many mutual funds and exchange-traded funds (ETFs) in the market today with these objectives, making environmentally friendly companies a popular investment choice for people looking to make an impact with their investments. Some of the largest are iShares Global Clean Energy ETF and Pax Global Environmental Markets Fund.*
- Social issues – Social investing focuses on companies that consider the impact of their business on all people, and seek gender equality, provide healthy working conditions and lifestyles, address wealth inequality, and show a commitment to charitable endeavors. This is a newer dimension of sustainable investing, but there are still options in the market for social investing. The largest fund is the SPDR SSGA Gender Diversity Index ETF.*
- Governance quality – Strong corporate governance systems are important because they contain policies that protect shareholders over company management. One example of strong corporate governance is including an independent audit committee to ensure that management is not putting their needs over the financial success of the company and its shareholders.
If you are interested in ESG investing, but aren't sure how to get started, you may want to consider a professionally managed mutual fund. Either way, with a plethora of choices, it's increasingly possible for you to invest based on your principles.
*Source: ETF database, as of June 25, 2018.
Past performance is no guarantee of future results.
Indexes are unmanaged. It is not possible to invest directly in an index.
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