Paula Thielen is the managing partner and financial advisor at Thielen & Associates, Inc.
We’ve all heard the buzzwords and seen the headlines: Sustainable investing is on the rise. But what does it really mean for your investment portfolio? A recent Morgan Stanley study found that over 50% of individuals feel they have limited knowledge about how to start sustainably investing, while 43% of respondents said they lacked financial advice on this topic.
As a financial professional, I see the growing interest in sustainability as both an opportunity and a challenge for investors. Let’s explore the key trends, regulatory pressures and governance factors shaping this movement, and consider the benefits and challenges of sustainable investing.
Market Trends
Sustainable investing has gained significant traction over the past decade. This surge is driven by a heightened awareness of environmental and social issues, coupled with the financial advantages of investing in companies that prioritize sustainability. Assets under management in sustainable investments have risen substantially over the past decade.
Lately, I’ve observed firsthand how Millennials and Gen Z are driving this trend. A study performed by Chase Bank found that 36% of survey respondents (either Millennials or Gen Z) are interested in integrating sustainable investing into their current portfolios. They are not just looking for financial returns but also want their investments to reflect their personal values. This shift has led to a proliferation of sustainable investment options, from green bonds to impact funds, catering to a variety of investor preferences.
Regulatory Pressure
Around the globe, regulatory bodies are stepping up their focus on sustainable investing, introducing new rules and guidelines focused on transparency and accountability. These regulations aim to combat greenwashing so investment products marketed as sustainable truly adhere to their claims. In the United States, the SEC has implemented stricter climate-related disclosure requirements, while Europe’s Sustainable Finance Disclosure Regulation (SFDR) seeks to enhance transparency in the financial sector.
Navigating these regulations can be complex. As an advisor, I often find myself educating clients about the importance of these rules and how they protect their investments. For example, the SFDR requires detailed disclosures on how sustainability risks are integrated into investment decisions, which helps investors make more informed choices.
Governance Factors
Good governance is a cornerstone of sustainable investing. Investors are increasingly looking for companies with robust governance practices, including diverse and independent boards, transparent executive compensation and strong risk management processes. These factors are crucial for ensuring that companies are managed responsibly and can deliver long-term value to shareholders. Effective governance also helps mitigate risks associated with environmental and social issues, making it a key consideration for sustainable investors.
In my experience, companies with strong governance frameworks tend to perform better over the long term. They are more resilient to crises and better positioned to capitalize on opportunities.
The Rise Of Sustainable Investing
Benefits
Sustainable investing offers a multitude of benefits, both financial and nonfinancial. Companies that prioritize sustainability often exhibit better long-term performance, as they are better equipped to manage risks and seize opportunities related to environmental and social trends.
Additionally, sustainable investments can drive positive societal outcomes, such as reducing carbon emissions, promoting social equity and enhancing corporate transparency. This dual focus on financial returns and positive impact makes sustainable investing an appealing option for many investors.
Challenges
Despite its advantages, sustainable investing is not without its challenges, such as the lack of standardization and the difficulty of measuring performance. Furthermore, there is ongoing debate about the financial performance of sustainable investments compared to traditional investments. However, growing evidence suggests that sustainable investments can deliver competitive financial performance while addressing critical global challenges.
As an advisor, it’s common to encounter skepticism from clients who are new to sustainable investing. They worry about potential trade-offs between sustainability and returns. I explain that it’s all about finding the right balance and aligning investments with one’s financial goals and personal values.
Conclusion
Sustainable investing is a fundamental shift in how we think about finance and its role in society. By integrating these factors into investment decisions, we can potentially achieve financial success and positive societal impact. I am excited to be part of this movement and to help clients learn more about sustainable investing. Whether you’re a seasoned investor or just starting out, there are numerous opportunities to align your portfolio with your values and contribute to a more sustainable future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
This material was created by Thielen & Associates, Inc. for use by Forbes and does not represent the views and opinions of Avantax Wealth Management or its subsidiaries. Please view all applicable disclosures here.
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