When you create a sustainable investment portfolio, you can expect rewards beyond just monetary value.
A sustainable investment portfolio incorporates financial assets such as stocks and bonds that align with an investor’s values, such as their concern for the environment or awareness of social issues.
A well-planned sustainable portfolio will have components aligned with your goals and meet your risk tolerance level.
Sustainable investing with a conscience offers opportunities to promote sustainability while also making a return on your investment. However, just like any other type of investment, sustainable investing requires research and planning before you dive in.
The following is an overview of some elements common in a sustainable investment portfolio.
1. Diversified Investments
A key element in sustainable investing is creating a diversified portfolio. This means investing across a range of asset classes and investment sectors to increase your portfolio’s overall risk-adjusted return.
As sustainable investing is still a very immature asset class, you should try to diversify your green portfolio across all asset classes. Sustainable investments can be broadly categorized into two investment strategies; equity and debt.
Equity investments are made in green companies, whereas debt investments are made in green projects or ventures such as renewable energy projects. Investing in equity and green debt assets helps you diversify your portfolio across different types of assets, sectors, and geographies.
2. Long-Term Investment Strategy
Sustainable investing is often seen as an alternative to investing in mainstream assets like stocks and bonds, but it’s essential to view this approach as part of a long-term strategy.
It’s naive to think that investing in sustainable assets will lead to outsized returns without taking on additional risk. In reality, green investing typically adds a small but diversified percentage to a well-balanced portfolio.
When investing in sustainable assets, you should consider them a long-term holding. This is because sustainable investment is still relatively new and unproven. There can be significant volatility in this space, but the long-term trend is upward as the global economy transitions toward a low-carbon economy.
3. Eco-Friendly Investments
One of the most important factors to consider when investing in a green portfolio is its overall eco-friendliness.
It may sound obvious, but you should only invest in projects and companies that reduce ecological damage or improve environmental performance. This is an integral part of the portfolio’s long-term viability. Investing in environmentally friendly projects can also help you earn a competitively-low interest rate due to their relatively low-risk profile.
4. Quality Over Quantity
The final rule when investing in green companies is to focus on quality over quantity. This means that you should only invest in the most promising and high-quality green companies.
You should avoid investing in green companies just because you can. Always remember that quality investments with a strong green track record are the best way to grow your green portfolio.
You should only consider companies with a clean track record and a proven history of environmental stewardship. Avoid companies embroiled in scandals or have a history of fraudulent behavior.
There’s no denying that sustainable investing is a lucrative market. It’s expected to grow at a CAGR of 16.5% over the next five years. Its growth will only be accelerated by government support and technological advancements in renewable energy, electric mobility, and sustainable agriculture.
However, sustainable investing is still a nascent industry with plenty of room for error. To make the most out of it, ensure your sustainable investment approach considers these four elements.