As sustainable, responsible and impact investing (SRI) continues to gain popularity, more investors have questions and are curious to see if it's right for them.
According to US SIF, the Sustainable Investment Forum, about $8.4 trillion is invested using sustainable investing strategies in the U.S. — that’s equivalent to one out of every eight professionally managed dollars.
Despite some of the negative politics leveled at responsible investing, using ESG (environmental, social and governance) metrics to construct a portfolio is simply a good practice. As a fiduciary, it’s important for me to know as much about a potential investment as possible, and ESG metrics are just as important as traditional, fundamental measurements.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It's critical to keep in mind there is a difference between ESG and sustainable investing. ESG is simply the metrics — it’s the data that helps your adviser make a decision about your investments. Sustainable investing is the final portfolio. Some investment managers will try to create a portfolio by layering ESG risk metrics over a traditional index such as the S&P 500. While this may have a better outcome than the original portfolio, it still usually includes fossil fuel companies and other non-sustainable companies.
A truly sustainable investment portfolio is built with intention, asking the question, “What kinds of companies are going to make the world a more sustainable and resilient place?” It’s a new way of thinking for a new economy.
I like to describe the difference like this: An ESG index that reduces its exposure to ExxonMobil is “less bad.” A portfolio that eliminates the company is better. But a portfolio that replaces it with First Solar is sustainable.
With all of that in mind, here are three key questions that you should ask your financial adviser about responsible investing:
1. How much experience do you have with sustainable investing?
The practice has been around for decades, but only a select few advisers have specialized in it. Brokerage houses of all sizes have added ESG portfolios to their investment options, but not all of their advisers have taken the opportunity to educate themselves on the ins and outs of SRI. Look for advisers with the CSRIC designation, which means they are a Chartered SRI counselor and completed a course on the topic.
2. How will you avoid greenwashing and create an intentional sustainable portfolio?
All too often, the ESG portfolios that brokerages put together include greenwashed ESG index funds, or ESG funds that are not sustainable. As described above, these portfolios are simply less bad versions of traditional stock indexes. I’ve found that most individual investors are interested in a solutions-based portfolio — one that truly reflects their personal values. An impersonal ESG index fund likely won’t meet your priorities. It’s just as important to understand what companies the adviser is removing from and adding to your portfolio.
3. Do you use outside managers?
A great way to eliminate the oftentimes proprietary investment recommendations proposed is for an adviser to use an outside expert SRI portfolio manager. These are often termed SMAs, or separately managed accounts. Your adviser basically contracts with the outside expert portfolio manager to oversee the investments for you while the adviser continues to manage the relationship. It’s the best of both worlds!
When you choose to invest with your values, it may make for an uncomfortable conversation with your current or prospective adviser. But it’s important that you not be shy about asking the tough questions — you don’t want to get a year or two into the relationship only to find out that your investments include ExxonMobil and DuPont (which is entirely possible with some “less bad” ESG index portfolios).
These three questions are just a guide to get you started becoming a more responsible investor. There are many more questions to ask depending on your personal situation, values and goals. Make a list before your meeting, and don’t be afraid to say “next” and move on to another expert if your adviser doesn’t understand how to craft a sustainable portfolio that aligns with your values.
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
Cash vs. Mortgage: How to Pay for Your Second HomeShould you buy your second home outright or finance it with a loan? Weigh the pros, cons and tax implications before making the leap.
-
Gray Divorce Can Throw Your Retirement a Curveball: What to KnowIf you're entering retirement and going through a divorce at the same time, you've got some work to do to shore up your long-term financial security.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both WorldsBefore investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
How an Expired Passport Thwarted Blackmail (and What Other Important Documents You Should Keep)An optometrist produced his expired passport to foil a blackmail attempt by the daughter of a former employee. After proving he was out of the country on the date of a forged diary entry, he took it a step further.
-
Optimize, Grow, Retain: The Power of Annual Client ReviewsFinancial advisers can use annual reviews to help enhance client outcomes, strengthen relationships and build their practice.
-
I'm a Real Estate Investing Pro: This Is What Investors Should Know About Truck Stop InvestmentsTruck stops might seem like good investments, but they can actually be a risky gamble due to unstable fuel prices, unreliable operators and coming changes in transportation. Instead, consider safer options like industrial or residential properties.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
