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Put your mutual funds where your mouth is: the rise of sustainable investing

A centuries-old pursuit with a new data-driven solution.

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Sustainable investing has grown rapidly in the last few years. To wit, SRI (sustainable, responsible, and impact) assets in the US increased by 38 percent from 2016 to 2018, to the tune of $12 trillion in total. But few know exactly what sustainable investing is and how it can affect the bottom line of their portfolio.

Aligning your investments to your values isn’t a novel idea. For centuries, investors have injected their beliefs into the marketplace with their portfolio strategies. But historically, they did it by avoiding specific companies or withdrawing their funds. Divestment and screening have been used across centuries to protest everything from the arms industry to apartheid to tobacco. This type of investment strategy has increased social awareness around certain companies with questionable practices. But directing funds away from certain companies and industries doesn’t add value to your portfolio or provide proactive spending opportunities.

Enter in the new age of sustainable investments. The theory behind sustainable investing is that you can put your dollars where your values are, so to speak. According to Brian Deese, the global head of sustainable investing at BlackRock, “sustainable investing combines the best of traditional investing approaches with insights and data about sustainability-related issues in order to improve long-term financial outcomes.” Companies are analyzed for their environmental, social, and governance impact and given an ESG score. This data-driven approach aligns with the idea that, in theory, sustainable business practices will ultimately be profitable ones. For example, companies that treat their workers fairly are at a lower risk of a workers’ rights scandal that could threaten their overall stock value.

So what does sustainable investing mean for the future of finance? It could have a snowball effect: Increased investments in businesses with strong sustainability practices could encourage other companies to follow suit and motivate them to become more sustainable and responsible. While finance alone may not be able to solve the biggest problems the world is grappling with today, innovations in investing could be on the front edge of meaningful change.

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