Adding environmental, social, and governance (ESG) criteria into the investment process to align investments with personal values and beliefs are known as sustainable portfolio management, often referred to as socially responsible investing (SRI).
In addition to generating a profit, it seeks to advance a more just and sustainable society. Although it can seem simple, several essential factors are important to consider when implementing sustainable portfolio management. Here are some of the reasons why sustainable portfolio management is not simple.
There Is No One Size Fits All
The fact that there is no one-size-fits-all investment strategy means that sustainable portfolio management is not simple. Different investors may have different standards for socially responsible investments since they hold different values and beliefs.
Furthermore, it may be challenging to quantify an investment’s impact, and the criteria used to identify socially responsible investments can be arbitrary. Therefore, it can be challenging for investors to decide how to match their assets with their values and views effectively.
Managing a Sustainable Portfolio Takes Time and Effort
Socially responsible investment selection and management is more challenging than typical investing methods, and the profits on these investments are also lower at the start. Investors must be prepared to conduct the necessary study to find the best sustainable investment opportunities. This can involve investigating a company’s business practices, examining its financial accounts, and determining whether its operations might harm the environment and society.
Some Companies Are Greenwashing
The third reason why sustainable portfolio management is not simple is that there are chances that some businesses will greenwash despite their claims to be socially responsible. Investors should conduct an extensive study rather than merely depending on the company’s self-reported ESG statistics. Investors should also be mindful of the many greenwashing strategies businesses apply, such as confusing language or a concentration on minor business operations while disregarding more significant ones.
It Involves Actively Searching For Sustainable Businesses
Another crucial factor is understanding that sustainable portfolio management involves searching for and investing in businesses tackling social and environmental challenges. It goes beyond just removing particular sectors of the economy or companies from the portfolio.
This can include businesses that support diversity and inclusion in the workplace, sustainable agriculture, or renewable energy. Benefit investing is a subset of SRI that concentrates on investing in companies, organizations, and funds to produce both a financial return and a quantifiable social and environmental impact.
It’s also important to note that sustainable portfolio management can be carried out using particular investment instruments, like exchange-traded funds (ETFs) or mutual funds, which track socially responsible indices or portfolios.
These funds are often managed by a group of experts that choose the underlying holdings based on specific ESG criteria and have a focused objective, such as environmental sustainability or community development.
Socially responsible investment, also known as sustainable portfolio management, is a sophisticated and multifaceted method of investing. It needs a full awareness of the many sustainable investing strategies, a dedication to carrying out the necessary research and due diligence, and the readiness to accept possibly lower returns.
Furthermore, it’s crucial to consider the danger of greenwashing and be aware that this strategy might not be appropriate for all investors. Sustainable portfolio management, however, can be an excellent method for investors driven by factors other than financial returns.