Why you should care about sustainable investing when building your portfolio
This post has been brought to you in partnership with Scotia iTRADE. All thoughts and opinions are my own and do not necessarily reflect the views of Scotia iTRADE.
Most of us live our lives according to the values we hold.
We know what matters to us and we know what we consider “ethical” behavior. When we know who we are and what we value, it’s easier to make decisions about what we’ll do, and how we will spend our money.
One of the things you might not be paying as much attention to, though, is whether or not your investments match your values.
Chances are, your investment portfolio has been set for quite some time and you haven’t done much to change it up.
Online brokerages are starting to pay attention to things like sustainability, and Scotia iTRADE is the first in Canada to offer sustainable investing tools for direct investors that allow you to learn more about socially responsible companies and funds to invest in.
What is sustainable investing?
First of all, it’s important to understand what sustainability means when it comes to investing.
Sustainable investing (or socially responsible investing) is the practice of buying companies and/or funds that promote socially responsible practices. This means that you want to find companies that try to follow sound environmental, social, and governance practices. Additionally, you can use these criteria to find mutual funds and ETFs that are made up of sustainable companies.
Related article: What is socially responsible investing?
Sustainability by most measures involves the following areas:
As you might expect, the environment is one of the most important measures of a company’s sustainability. Some of the things that influence whether or not a company engages in sustainable environmental practices include:
- How much effort goes into energy efficiency.
- Efforts to reduce carbon emissions.
- Practices that cut down on the amount of pollution to air and water.
- Reduction in activities that contribute to deforestation.
- Activities that use fewer resources, especially water.
Companies can make changes to their operations so that they are more environmentally friendly in the long run. When this happens, they get a higher score in the ESG rating systems.
Social initiatives are also part of sustainable investing. This deals more with how the company interacts with people. How does it treat its employees? Do employees receive fair pay and benefits? Are there wellness perks that contribute to the employees’ quality of life?
Other aspects of social responsibility include diversity and the way the company meets labor standards and best practices.
You can also measure a company’s social awareness by the way it treats its customers. This means that there is an emphasis on product safety as well as data protection and privacy. In the end, a company that treats its customers right is more likely to avoid costly lawsuits and other problems.
This is an area that can be of great importance when you are evaluating a company for its strong (or weak) fundamentals. Governance includes things like the makeup of the board and the type of audit procedures in place. It also includes the compensation executives receive.
These are items that can have a big impact on how well the company does financially.
If you are a little more interested in whether or not the company’s governance meshes with your personal values and ideals, you can also look at their lobbying efforts and political contributions. In some cases, you might not want to invest in a company that donates to causes that you disagree with on a fundamental level.
Should you focus just on sustainability?
Focusing on sustainability in your portfolio can be a good way to find good companies.
With environmental upgrades, it’s possible that a company spends a lot of money upfront. This can mean reduced profits until the benefits are seen. And there are some changes that just won’t result in direct profits ever. Instead, it’s about the goodwill the company engenders.
Because of this, it’s important to make sure that you aren’t using sustainability as your only criteria for choosing investments. While it can be added to a screening tool like that offered by Scotia iTRADE, it shouldn’t be the only thing you look for.