New York Life Investments BrandVoice: 3 Tips To Get Started With Sustainable Investing (2024)

By Lisa Wirthman

Sustainable investing has gained considerable momentum in recent years—and shows no signs of slowing. Over $30 trillion in global assets (and $12 trillion in U.S. assets) were managed with a sustainable strategy in 2018, according to a biannual report from the Global Sustainable Investment Alliance.

But despite the growing opportunities for individual investors in this space, understanding how to allocate to different sustainable strategies can be difficult. Sustainable investing considers environmental, social and governance (ESG) policies alongside traditional financial metrics. But there are different approaches to consider.

It’s important for investors to take the time to understand the different sustainable strategies, says Keith Dixson, head of international development at CANDRIAM, a New York Life Investments Company.“They should really dig in to understand the fundamentals and question what they're being told to understand what it is that they’re investing in, how it’s being executed and what the outcome is,” he says.

Sustainable investors often get confused over the semantics of “values” and “value” when considering different investment strategies, says Dixson. A values-based approach aligns investors’ portfolios with their moral values and beliefs, he says. It is often a binary approach that rates companies as either good or bad and can exclude entire sectors, like tobacco or gambling.

In contrast, a value-based approach is more systematic. It weighs a company’s sustainability factors in addition to traditional financial metrics to assess the overall worth of an investment. “It gives you another lens to look through,” Dixson says.

The right approach depends on the investors and can include a mix of different strategies. “It really comes down to their individual ambitions, how they structure their portfolio, what impact they want to have and what financial return they are seeking,” Dixson says.

The first step to identifying the right sustainable approach for your investments is to consider your goals, according to a New York Life Investments guide to sustainable investing. Do you want to align your investments with your personal values? Are you hoping to add sustainability factors to your investing? Or do you want to more directly target your investments to create noticeable change?

Start by outlining your investment goals, which can help you decide which sustainable investment approaches may be the best fit for your objectives. Here are three tips to help you get started.

1. Consider The Negative And The Positive

If you’re interested in aligning your investments with your personal values, a negative screening approach excludes certain sectors of investments. Historically this approach has been used to screen out so-called “sin stocks” associated with activities like alcohol, tobacco or gambling.

Negative screening is the least expensive and easiest option to select, according to New York Life Investments. Dixson warns, however, that this binary approach of simply rating one company as “good” and another as “bad” may leave out important context.

“All companies are in flux and are impacted by different factors,” he says. Excluding stocks also naturally reduces your opportunity set—and creates the additional challenge of how to allocate the excess capital you’re not investing, he adds.

If your goal is to incorporate sustainable risks and opportunities into your analysis, consider positive screening. This approach proactively includes ESG factors in investment valuations. Rather than excluding any one industry, sector or company, positive screening can assess different companies within a sector and select those with more progressive ESG policies and activities, according to Dixson.

In contrast to negative screening, this approach provides opportunities to invest in companies or sectors with improving ESG metrics.

You can also incorporate both strategies, Dixson says. That might mean negatively screening out chemical and biological weapons across your entire portfolio, but then positively screening for the most progressive companies from other sectors, as he describes it.

According to the New York Life Investments guide, the main goal of this approach is to generate positive performance, not to directly effect social or environmental change.

2. Get As Proactive As You’d Like

Some want their investments to more directly address a problem (like climate change) or work toward a goal (like fighting hunger). It’s these sorts of investors who are responsible for impact investing’s remarkable growth. Of the $30.7 trillion in global assets managed sustainably in 2018, impact investing accounted for $502 billion, according to the Global Impact Investing Network (GIIN). A 2020 survey by GIIN now estimates the size of the current global impact investing market at $715 billion.

Among the different sustainable investing approaches, impact investing is the most proactive strategy: Investors aim to expressly create positive change while still seeking to make a profit. Those returns can range from above-market rate to below-market rate depending on the investor’s goals.

Historically, impact investing is local and often involves family and foundation investments in projects that deliver quantifiable local impacts. But the approach is broadening as overall interest in sustainable investing continues to grow.

3. Balance Active And Passive Investing

Many investors select a combination of negative screening, positive screening and impact investment approaches to meet their goals, says Dixson.

“You can all do all three approaches at one time and you can do it in varying degrees of each,” he says. “It really comes down to investors’ individual ambitions, how they structure their portfolios, what impact they want to have and what financial return they want to have.”

The combination of approaches requires both active and passive management. Active investing involves frequent buying and selling, according to the theory that keeping on top of a portfolio in this way is the best way to maximize profits. Management fees are typically higher to compensate for the additional trading activity. By contrast, passive investing strategies minimize trading activity, on the theory that once a good investment is made, it should patiently be allowed to grow. They often involve the purchase of such low-cost vehicles as index funds. Fortunately, in sustainable investing, there is room for both strategies to thrive, according to the New York Life Investments guide.

According to the guide, positive ESG screening and impact investing are better suited to active management strategies. These enable managers to engage with their investments and select companies or funds with improving ESG ratings. Conversely, negative screening is a good match for passive strategies, which can correspond with benchmark ESG indexes across different asset classes and offer simple low-cost options.

Once you outline your investment goals—and consider different sustainable strategies—you might want to talk with an advisor who can help you take the next steps, says Dixson.

“Educate yourself to be able to identify what is important,” he says. “And then seek to have an impact.”

Lisa Wirthman is a journalist who writes about business, public policy and women’s issues.

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