Some investors see the current investing environment—which depends heavily on the stability of oil companies, insurance providers, and large financial institutions—as unsustainable in the wake of climate change. As stricter governmental measures must be put into place to combat the effects of climate change, even once-reliable investments may be at risk. Can socially-responsible investing (SRI) help turn this tide? Learn more about this investment philosophy and what it may mean for the future of climate change.
What Do Socially-Responsible Investments Include?
The term SRI can encompass just about any number of investment products and industries, though much of today's SRIs are primarily focused on climate change. These investments target companies that have committed to sustainability, innovated climate-saving technologies, or are otherwise addressing climate change risk in a transparent manner.
SRIs can include index funds and ETFs, mutual funds, or individual stocks. Even some real estate investment trusts (REITs) and other non-standard investments are beginning to join the SRI movement, committing to sustainable and energy-efficient operation both now and in the future.
How Can SRI Combat Climate Change?
Investors have begun to gravitate toward SRIs after seeing how climate change is already having an impact on certain investments. Sudden unexpected events like floods, wildfires, severe hurricanes and tropical storms, and droughts can majorly disrupt certain businesses and even entire industries. These events are likely to only increase in severity during the coming years.
In 2019, nearly $21 billion was put into companies with a public commitment to environmental, social, and governance (ESG) issues, including climate change.1 In 2018, this figure was only around $5 billion, which just goes to show how quickly these products are catching on. Some investors report that they're exiting oil- and gas-heavy investments in particular because of the risk of future costs that aren't priced in.
For example, if environmental and pollution regulations are strengthened in the future, these companies could struggle to adapt—and companies that have polluted the air, water, and soil surrounding their businesses could be on the hook for major fines and legal costs.
And in most cases, switching to SRI products to help tackle climate change won't harm your bottom line as an investor. A recent study showed that the S&P 500 businesses that incorporated sustainability into their corporate goals, even at an added cost, were performing better than the companies that hadn't.2 By slowly shifting toward more climate-conscious investments, investors might increase their returns while also helping combat the climate crisis.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Please keep in mind, the return on values based investments may be lower than if you make decisions based solely on investment considerations. Exchange Traded Funds concentrating in specific industries are subject to higher risks and volatility than those that invest more broadly. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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