When considering ways to live a more sustainable lifestyle, investments aren’t usually the top-of-mind answers for most. But as it turns out, how you invest can have a significant impact on cultivating a greener economy. This is especially true as more and more companies begin to understand the importance of sustainable business.
Retirement investment firms have recognized this need too, with a group of eight pension funds recently coming together to call on corporations to standardize disclosure of environmental, social, and government (ESG) factors that affect investment decisions. In this way, not only would companies show how they manage issues such as human capital, climate change, and social governance to big-time investors, but individuals can also make better decisions on how to contribute while seeing returns. ESG investments have been shown to have similar returns compared to more traditional investments — without harm to the environment.
So if you’ve considered putting your investment dollars to work in a more sustainable way, then here are ways to make retirement investing green, too.
How to Build Wealth with Sustainable Investments
ESG investments can be done in several ways, from mutual funds that hold green stocks to buying shares of individual companies. Here are some tips to keep in mind as you get started.
Set Your Priorities
What is ethical to you may not fit with even the best company’s definition of being socially responsible, so take the time to really define what your values are in terms of sustainability to help you in choosing where to place your investment.
Do Your Research
Switching from traditional investments to go green may not be for everyone, especially with greenwashing — or when companies make false or misleading claims about their sustainable efforts — being a real concern. When doing your research, focus on the trajectory of a company’s investments and whether they’re doing so without any environmentally harmful practices. It’s easy for companies to provide lip service, but it’s worth going the extra mile as a responsible investor. Look for documentation on their business model, financial health, the ways ESG is embedded in their operations, and the kind of impact the firm creates in communities.
Invest in a Retirement Account
When choosing green investments, try to keep an eye out for those that you can put directly into a retirement account. A great option for Canadians with a registered retirement savings plan (RRSP) is to invest in Solar Bonds, which are RRSP-eligible. Solar Bonds provide a 5% fixed rate semi-annually as it helps fund community-based solar electricity, and your RRSP will let your money grow tax-free. Just be sure to avoid RRSP withdrawals until your actual retirement, as the tax penalties for doing so can just cancel out the benefits!
Meanwhile, Americans hoping to invest in ESG funds can also look to do so in their 401(k) retirement plans. The majority of these plans have included ESG metrics in recent years, and while not purely ESG funds, there are many funds with high sustainability ratings in one aspect or another. You can also consider conventional funds with higher ratings, such as Fidelity’s Contrafund, which has a large-cap growth and low-carbon ratings. Another option worth considering is the T. Rowe Price Diversified Mid-Cap Growth fund, which also has a low-carbon rating and a return of 11.2% over a 15-year basis.
Try a Robo-Advisor
If you’re still feeling a bit lost with your options even after conducting some research, a robo-advisor is a great tool you can use to start investing in socially responsible portfolios and access ESG investments. These digital advisors allow you to build and manage portfolios based on your goals and risk tolerance. When choosing one, check the methodology they use to ensure that they have filters that will help narrow down your options. Whether you end up choosing an individual stock to invest in or decide to go with a mutual fund to diversify your portfolio from the get-go, a robo-advisor can help you reach a decision fairly easily.
The Bottom Line
When making green investments, it’s essential to look towards the long term. Look for opportunities to include low-carbon or renewable energy investments in your portfolio. By putting in the work to find a company that makes its daily effort clear day in and day out, you can be sure to contribute to one that makes the biggest impact — both on the world and in your golden years — in the long run.