Environmentally conscious investing: is it for you?

One thing we all love is having choices. From the clothes we decide to put on in the morning, to what we eat for lunch, our mode of transportation, to how we spend money–we tend to feel happier when we have a good balance of options and control in our decisions. 

Investing is no different. And fortunately, there are more ways to invest today than ever before. And as a generation growing up in the aftermath of climate change denial, more and more individuals are starting to look into environmentally conscious investing.

Come read along with us as we answer these questions:

• What is environmentally conscious investing?

• What are its benefits?

• How has environmentally conscious investing performed?

• How well do you know your investments?

What is environmentally conscious investing?

Environmentally conscious investing is a form of investing that’s focused not only on financial returns, but also on the impact companies have on the environment, society, and how they run their businesses.

Some examples of environmental factors that are taken into consideration include a company's carbon footprint, use of renewable energy, waste management practices, and overall commitment to sustainability.

Remember when Erin Brokovich took on PG&E for contaminating groundwater that caused widespread illness in Hinkley, California? That’s an example of a company that would score low.

What are the benefits of environmentally conscious investing?

There are several main benefits of environmentally conscious investing.

1. Values-based: At its core, environmentally conscious investing is values-based. This means you can choose to invest–or not invest– in companies and industries that align on your values. It means you have more choices.

   
   

2. Positioned for the future: Environmentally conscious investing is a way for people to invest in businesses that are well-positioned for future challenges such as limited natural resources, climate change, and changes in social expectations. That might even mean that they may grow and adapt faster, compared to companies that haven’t thought deeply about the future.

   
   

3. Adaptable: Companies that have thorough environmental practices in place may be better prepared to handle new government regulations down the road and avoid penalties for non-compliance.

How has environmentally conscious investing performed?

Some people believe that choosing environmentally conscious investments always comes at a cost of lower returns. And while there are a number of folks who are okay with lower returns to help create a brighter future, recent years have seen strong performance of renewable energies, electric vehicle manufacturers, and other industries that fit within “environmentally conscious investing”. 

There are many environmentally focused funds that have had similar or even higher returns than traditional investment options. However, like all investments, returns are not guaranteed. 

Studies suggest that environmentally conscious companies may even outperform their counterparts over longer time periods. Here are some examples:

Morningstar: A study by Morningstar found that sustainable funds consistently outperformed traditional funds over various time frames. The study showed that, on average, sustainable funds outperformed their peers in 2020 and over the preceding three, five, and ten years.

MSCI Research: MSCI conducted a study that revealed companies with high environmental, social, and governance (ESG) ratings demonstrated lower volatility (prices didn’t go up and down as extremely/often) and higher profitability over time. This supports the idea that environmentally conscious investing can be resilient and profitable. (Historical performance results are presented for illustrative purposes only. Past performance is no guarantee of future results.)

Harvard Business Review: A Harvard research study found that companies with high ESG scores typically had lower costs of capital and higher valuation multiples. That simply means that companies–who are performing well from an environmental, social, and management point of view–tend to get easier access to money because more people think the company is valuable.

A list of sustainable equity index funds

How well do you know your investments?

What you may find interesting is that many people don’t fully realize what they’re invested in. For example, exchange traded funds (ETFs) and mutual funds are a popular way to invest because you can get exposure to a lot of companies all at once.

However, many of these funds have holdings that include companies in industries that are generally not perceived as environmentally friendly such as oil and gas, factory farming, or fast fashion (like Forever 21 or Shein) due to their negative impact on pollution. 

Similarly, some ETFs have exposure to payday lenders, for-profit prisons and “sin stocks”–companies that are involved with activities that have broader societal impacts such as tobacco, gambling, alcohol, weapons, and adult entertainment. 

For example, large ETFs like Vanguard’s VOO which follow the S&P 500 can have exposure to companies such as CZR, LVS, MGM, and WYNN which are in the Casinos & Gaming industry. 

Other well known ETFs like Vanguard Total Stock Market Index Fund and the iShares Russell 2000 ETF have both held payday lender World Acceptance Corporation (WRLD) and FirstCash Holdings, INc. (FCFS) (Source: Yahoo Finance, 2023).

Also, even if an ETF has a suggested theme, the holdings that make up the fund may be different than you’d expect. 

So if you want your money to be aligned with certain values, take some time to look under the hood. You might not have your money invested in companies that align with  how you live your life. 

How Plenty can help

At Plenty, we allow for fine grained control (unlike ETFs/mutual funds) where we'll make sure you don't accidentally invest in things you don't believe in. 

How does that work? First, we combine independent reports from business analysts on the governance and environment practices of corporations. We then screen companies for level of involvement in values ie. manufacturing tobacco products, arms productions, etc. 

Companies that have engaged in any of these practices in the past 6 months, are excluded as options for your portfolio. Learn more about sustainable investing with Plenty in our help center.

About Plenty

Plenty is an investment platform designed specifically for couples to build wealth, together. We go beyond budgeting, making it simple to invest, save and grow towards your future goals by unlocking access to the financial strategies of the wealthy. Ready to get started? Sign up for your 1 month free trial today.

Enjoying the blog? Sign up for our newsletter for the latest news and expert advice about money, relationships, and everything in between. 

——

The information provided herein is for general informational purposes only and should not be considered individualized recommendations or personalized investment advice. The type of strategies mentioned may not be suitable for everyone. Each investor should evaluate an investment strategy based on their unique circumstances before making any investment decisions.

Investing involves risk, including risk of loss. Past performance may not be indicative of future results. Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. We recommend that you consult a tax professional before taking action.

Plenty does not provide legal or tax advice. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic, and geo-political conditions