Funding your retirement will require you to invest your nest egg and watch it grow, but what many people don’t realize is that they can invest with a positive impact on the world while also watching their money grow. In fact, the demand for investments with an impact focus is growing. Here are several ways to uncover impactful investments.
Introduction to ESG
Impact investing is also known as ESG, or investing with environmental, social or corporate governance goals. You may not be worried about corporate governance, which impacts how much of a say you have in what happens to the companies you invest in.
However, when you discover how easy it is to invest with an impact on environmental or social issues, you may want to get started right away. The key is to avoid the stocks of companies whose policies you disagree with and buy the stocks of companies whose ideas you support.
This can be as simple as avoiding gun, oil or cigarette stocks, but it can be more complicated if it goes beyond what companies produce or the services they provide and digs into what their management teams believe. Finding such investments can be tricky unless you know where to look.
Looking for ESG funds
For the beginner, the easiest way to invest with an impact is to go through a financial advisor who specializes in ESG investments. The best option is an advisor who works only for fees and doesn’t push certain investments just because they earn a commission on them.
If you can’t afford a fee-only financial advisor, you can get a similar effect by doing some research into ESG funds, although this requires a bit more time on your part. Most major firms now have ESG options, so a good place to start is with firms you may already be familiar with, like Fidelity, BlackRock or JPMorgan.
ESG funds often have words like “sustainable” or “ESG” in the name, so that can be a clue as to which funds might fit your strategy for impact investing. However, if you’re looking for specific social issues or other specific angles for your ESG strategy, you will have to dig deeper than just the name.
These are some low-cost ESG funds
Morningstar has compiled a list of the least expensive ESG funds to help with your research. Kiplinger also has its own list, and it provides even more information about each of the funds on its list.
It’s important to note that like all investment funds, ESG funds also follow a variety of strategies. Some invest in world stocks, while others are limited to the U.S. or emerging markets. Still others may invest in bonds instead.
It would be wiser to choose multiple funds that follow different strategies rather than piling all of your nest egg into one basket. Diversification is an investor’s best friend.
One way to save money on any funds you invest in is to choose passive funds, basically just means that they follow an index of stocks instead of having a person or team choose the stocks that are included in the fund. Since they don’t have to pay someone to actively manage the fund, passive funds are usually less expensive. The good news is that ESG options in passive funds have grown in recent years.
Morningstar lists the cheapest active and passive funds and states the category they fall into, whether that’s stocks or bonds. The firm also gives a list of the funds that have earned high ratings for their returns and other factors. Those who don’t know much about investing may find it helpful to target highly rated funds.
Picking stocks for impact
If you are more of an experienced investor or you want to pick your own stocks, you will have to do even more research than you would have to do if you were picking ESG funds. The benefit of choosing your own stocks is the fact that it enables you to really target specific social or environmental issues that concern you.
To choose your own stocks, it’s a good idea to use an online trading platform like E*Trade or TD Ameritrade, which offer low-cost options for those who want to do the heavy lifting of investing themselves. As a starting point, you might consider reviewing some common ESG indices to look for stocks that might fit your standards.
Unfortunately, most ESG indices do not reveal their components to individual investors, but Sustainalytics does have the components of some ESG indices listed, like the STOXX indices. A little bit of extra research can turn up some other ESG names, some of which you have heard of, like Microsoft, and others you may not have, like NextEra Energy.
Investor’s Business Daily also has a list of 50 ESG companies to provide another starting point for your research.
Maintaining returns during impact investing
One of the big concerns with ESG investing is the possibility that you could be sacrificing returns in exchange for making an impact with your investments. In the case of ESG funds, you’re probably paying a small fee to facilitate management with an ESG focus.
However, the good news is that more and more studies are showing that it is possible to invest for impact without sacrificing returns. If you’re choosing an ESG fund, you should compare the track records of the funds you are looking at against benchmark indices like the S&P 500 to see if they are performing at least as good as the market, if not better.
If you’re picking stocks, you will need to stay up to date on what’s happening with each company in your portfolio. You may also want to avoid stocks that are impacted significantly by what’s happening in their sector.
For example, Gilead Sciences has been quite volatile because of the negative headlines the pharmaceutical industry has seen, despite the fact that it is an ESG stock because of its commitment to making drugs accessible, even for low-income countries.
Wherever you invest your money, you are always voting with your investment account. Knowing where to look to find information about impactful investments is the first step toward making a difference with your investment account.