Do You Want To Invest In A Sustainable Future? Three Questions You Should Ask Your Advisor
As sustainable, responsible, and impact investing (SRI) continues to gain popularity, more investors have questions and are curious to see if it is 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., equivalent to one out of every eight professionally managed dollars.
Despite some criticism directed towards responsible investing, employing ESG (environmental, social, and governance) measures to build a portfolio is good practice. As a fiduciary, it needs to know as much as possible about a potential investment, and ESG criteria are equally as critical as traditional, essential evaluations.
It is vital to understand the distinction between ESG and sustainable investing. ESG is simply the metrics, the facts that your adviser uses to make investing decisions. The ultimate portfolio is made up of sustainable investments. Some investment managers will attempt to build a portfolio by adding ESG risk metrics to a typical index like the S&P 500. While this may produce better results than the initial portfolio, it still contains fossil fuel businesses and other non-sustainable industries.
A sustainable investing portfolio is constructed with purpose, asking, "What kinds of companies are going to make the world a more sustainable and resilient place?" It is a different style of thinking for a different economy.
An ESG index that reduces its exposure to ExxonMobil is "less bad." A portfolio that excludes the corporation is preferable. On the other hand, a portfolio that substitutes it with First Solar is sustainable.
With that in mind, here are three critical questions to ask your financial advisor about responsible investing:
What level of experience do you have with long-term investing?
Although the profession has existed for decades, just a few counselors have specialized. ESG portfolios have been added to the investment options of brokerage firms of all sizes. However, not all of their advisers have taken advantage of the opportunity to learn more about SRI.
How will you prevent greenwashing and build a purposeful, long-term portfolio?
All too often, brokerages' ESG portfolios incorporate greenwashed ESG index funds or ESG funds that are not sustainable. As previously said, these portfolios are less risky than typical stock indexes. The majority of individual investors desire a portfolio that truly reflects their ideals. An impersonal ESG index fund is unlikely to fulfill your needs.
Do you have any outside managers?
Using an outside expert SRI portfolio manager is a terrific approach to minimize the usually presented proprietary investment suggestions for an adviser. These are commonly referred to as SMAs, or separately managed accounts. Your adviser hires an outside expert portfolio manager to manage your investments while you continue to manage the relationship. It is like having the best of both worlds!
These three questions are only a starting point for being a more responsible investor. Many more questions can be asked, depending on your situation, values, and aspirations. Make a list ahead of time, and do not be afraid to say "next," and move on to another expert if your adviser does not understand how to create a sustainable portfolio that corresponds with your principles.
