You choose public transport or your bike to go to work, separate your trash, celebrate diversity and engage in your community. But have you ever thought about the ethics of your finances?
Investing doesn’t necessarily need to be speculative trading nor ignore the fact that there are companies out there dealing with weapons, disregarding human rights, or polluting. In its most basic sense, investing means supporting projects economically that you think that are going to be more valuable in the future.
Let’s take a look at what socially responsible investing (SRI) is and how your financial gains can be aligned with your principles. We will also explain why a conscious bet on sustainable assets not only contributes to building a better future on this planet but can also mean more stable investments over time.
Socially responsible investing is a strategy based on selecting companies that are sustainable and socially conscious for your portfolio. There are several ways to evaluate this. The most basic one is going through a screening to exclude companies whose business involves activities that are considered socially and environmentally damaging. This usually means refusing industries involved in the production of weapons, fossil fuels, alcohol, tobacco, fast food, gambling, pornography, or the military.
A more accurate classification system is based on the quantifiable metrics known as ESG: Environmental, Social, and Governance. These criteria try to measure the impact of the companies using three main issues:
Financial regulators along with sustainable investment organizations — like Eurosif — make sure corporations are compliant with their policies. Rating agencies analyze the information the companies provide (new EU regulations allow them to request this data) to give these ESG scores.
Different ESG rating agencies use different criteria and methodologies. For example, Sustainalytics rates companies by giving a different relevance to each evaluated point depending on the industry. This way companies are compared among their sectors. MSCI ESG Research, on the other hand, analyzes a series of key ESG issues, divided into ten topics. Thomson Reuters ESG Data also metrics clustered into categories with different weights in the overall score. With this criteria in mind, you can decide to focus your investments on specific fields you want to support.
In a nutshell, these are the advantages of SRI compared to a traditional portfolio:
On the other hand, you must take into account that these are long-term investments. The aim is to achieve sustainability for these projects in the future.
There are different ways to be a socially responsible investor. You can buy shares of companies with high ESG scores, be part of an ESG mutual fund, or purchase socially responsible ETFs. Sustainable indexes are the easier option for you to tackle a specific subject that concerns you. Some of the most widely recognized are the Dow Jones Sustainability Index (issued by Dow Jones Indexes) and the FTSE4 Good Index (FTSE, Financial Times Stock Exchange). Besides these, the Robo-advisors -apps that gather your preferences and profile, and create a tailor-made portfolio for you- could be also an option.
The easier and fastest way is to use your Vivid app. There you can find commission-free stocks with a good ESG score, such as Nvidia (NVDA), Microsoft (MSFT), Salesforce.com (CRM), Adobe Systems (ADBE). We also offer ETFs rated AAA by MSCI, like iShares MSCI Europe Financials ETF (EUFN).
New regulatory measures are enhancing sustainable finance. In particular, the EU will put in place measures to encourage private investment in sustainable growth in order to contribute to a climate-neutral economy. The goals of the Paris Climate Agreement cannot be achieved by using public funds alone.
There is also more demand from institutional investors seeking long-term guarantees. SRI also implies a statement and a differentiation strategy for banks, insurance companies, asset management firms that incorporate them in their mission.
It seems that karma works. All you invest to improve the world will go back to you eventually.
Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.