Many investors want to make a positive contribution to the future of our planet, while gaining positive returns on their money. They recognize the importance of supporting companies that manufacture energy-saving products, provide clean drinking water, reduce greenhouse gas emissions, clean up oil contaminated land and water, and deliver other environmental benefits.
Fortunately, investors can choose from a growing array of investments that are dedicated to sustainability strategies. They appeal to socially conscious investors who want to express their values without sacrificing performance.
The managers of these investments conduct extensive research in their sectors of interest, aiming to identify companies with the most promising technologies or business models. Having a professional do the homework is an important consideration, because it’s difficult to pick individual stocks that will do well on a consistent basis. After all, many companies that focus on sustainability are relatively small, compared with the Fortune 500 giants.
Sustainable investing may also call for a long-term strategy, since short-term values may fluctuate. For instance, the long decline in oil prices has made fossil fuels relatively cheap, depressing the value of alternative energy company stocks.
However, the planet's supplies of oil, natural gas, precious metals, clean air and drinking water are limited, and those resources continue to be depleted, regardless of current prices. That means it’s important to continue providing capital to companies developing sustainability products and services, like solar and wind power arrays, desalinization plants and anti-pollution devices, to name just a few examples.
Consider “green bonds”: While most investors think about stocks as the foundation for a sustainable investing strategy, there are other types of assets to consider, such as "green bonds." These are debt securities issued by public agencies and banks in developing countries to finance infrastructure projects like water and sewage treatment plants, affordable housing, hospitals and alternative energy facilities.
Let's say an economic development agency or bank in Latin America, Asia or Africa wants to finance a large-scale biomass power generation system, or a municipal government wants to build a new sewage treatment plant for the community. These public entities typically issue bonds to finance the construction and development work. Investors who purchase these green bonds to get these projects started, would then be repaid from the stream of revenue from users of these facilities.
Because the bond market historically has been far less volatile than the stock market, green bonds may be appropriate for investors seeking a sustainability strategy that provides both stability and a continuing flow of income.
There are some types of alternative assets that may also fall into the sustainability sector. For example, some funds purchase agriculture or timberlands around the world, protecting them from future development, while generating returns from those crops.
Investors can also purchase shares in funds that invest in infrastructure projects, such as airports, seaports, private power plants, or toll roads that promote economic growth and prosperity. Like green bonds, these infrastructure investments can provide a long-term flow of cash. Some infrastructure investments may also offer protection against inflation, because fees and tolls usually can be raised if the cost of living goes up.
Determine your priorities: Before diving into a sustainability strategy, it's a good idea to meet with your financial advisor and discuss the many available options. For example, you might want to start by allocating a small portion of your investment portfolio to the sustainability sector and then gradually expand your holdings once you see how they perform.
Your advisor can also help you develop a personal investment policy, based on your priorities and concerns. What environmental issues matter to you? What companies do you wish to avoid? And are there regions around the world that have attracted your attention in a positive or negative way?
Thinking about these issues, and writing down an investment policy provides a clear framework for determining how to allocate your assets. It also helps you stay on track towards your long-term goals, regardless of the daily ups and downs of the financial markets.
In summary, sustainability investing can demonstrate your commitment to improving our world, and leaving a positive legacy for your children and grandchildren. Just be sure you understand the financial risks and potential rewards of a strategy that reflects your own values and beliefs.
Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley. Follow him on Twitter @AMenachemMS.