Investors are increasingly aware that the financial services industry may not be best positioned to meet their future needs. Climate change, pandemics, and social instability are just some potential shocks that could impact the global economy in the coming decades.
As such, there has been an increased focus on responsible investing and sustainable wealth management. This has led to a significant rise in green or sustainable investment strategies. However, many investors are still unsure how to build a sustainable investment portfolio for themselves.
This article aims to help you understand the ins and outs of building a sustainable portfolio so that you can make informed decisions about where to put your money.
What Is a Sustainable Investment Portfolio?
A sustainable investment portfolio is an investment portfolio that aims to generate financial benefits for investors while also generating social and environmental benefits for society.
Sustainable investment portfolios are often similar to socially responsible investment (SRI) portfolios, but the term “sustainable investing” is generally used to describe strategies that address climate change and natural resource constraints in addition to social and governance issues.
Investing for a sustainable future requires a different mindset than what most investors are used to. While financial and market analysis are still crucial, sustainability investors must consider a much broader set of factors when making investment decisions.
Rather than focus on short-term earnings trends, sustainability investors must consider how various business models will hold up over the long term in a world impacted by climate change and resource constraints.
How to Create a Sustainable Investment Portfolio
Know the Basics of Sustainable Investing
The first step in building a sustainable portfolio is understanding the basics of sustainable investing.
Sustainable investing is about finding stocks that can generate decent returns while producing positive social and environmental impacts.
Different industries will be affected differently by these issues. Therefore, investors should consider how various business models will hold up in a world affected by climate change and resource constraints when evaluating stocks for inclusion in a sustainable portfolio.
For example, food and beverage companies will be impacted by climate change as droughts and extreme weather events negatively impact crop yields. And mining companies will be affected by resource constraints as access to metals like copper, gold, and lithium becomes more difficult as the world runs out of these critical materials at an increasing rate.
Develop a Long-Term Investment Strategy
Once you understand the basics of sustainable investment, you can develop a long-term investment strategy.
A long-term investment strategy is an investment strategy that aims to generate financial benefits for investors with a long time horizon. In other words, a long-term investment strategy is intended to create financial benefits for investors over a period of many years or even decades.
Diversify Your Portfolio by Asset Class
As you develop a long-term investment strategy, you should also consider diversifying your portfolio by asset class.
An asset class is a category of financial assets such as stocks, bonds, commodities, and real estate that are expected to perform similarly in response to changes in economic conditions. This also ensures that you don’t put all of your eggs in one basket, and you’ll have more investment options to choose from as you try to meet your financial objectives.
The Bottom Line
The world is changing fast, and the effects of climate change, over-exploitation of natural resources, and pandemic levels of inequality are becoming impossible to ignore. Given this context, it is more important than ever to put our money where our values are.
Unsustainable business practices are no longer an anomaly but seem to be the norm for many large corporations looking to attract investors and improve their bottom line.
With that said, the information in this article should be valuable enough to compel you to use your money to make positive changes for yourself and the world around you.