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.

Ready to get started? Start your free trial today!

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There is no assurance that a Fund’s investment objective will be achieved or that investors will receive a return on their capital.  Environmental, social and governance (ESG) strategies are subject to inconsistent industry definitions and standards for the measurement and evaluation of ESG factors. As a result, it may be difficult to compare ESG investment products or offerings.  When pursuing ESG investing, securities may be included or excluded from a portfolio based on ESG factors rather than other investment methodologies. As a result, a portfolio's performance may differ (either higher or lower) from the overall market or comparable portfolios that do not involve ESG strategies. Environmental ("E") factors can include climate change, pollution, and waste. Social ("S") factors can include how an issuer manages its relationships with individuals, such as its employees, shareholders, and customers. Governance ("G") factors can include how an issuer operates, such as its leadership composition, pay and incentive structures, internal controls, and the rights of equity and debt holders.