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Sustainable investing: What it is and where to start

Fight climate change, earn solid returns.

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This story is part of The Cost of Climate Change, CNET's coverage of how the changing climate impacts a range of financial issues.

The challenges of climate change are so macro -- so big and so daunting -- that they often only magnify the limits of our own individual agency. How can one person's action make an impact on an international fossil fuel industry that's deeply entrenched in our lives and economy? Well, in fact, there are many things we can each do in our own lives to make a difference. And perhaps one of the most significant is directing our financial resources toward the corporations, products and investments that will help fight climate change, instead of accelerating it.   

Many people don't think of themselves as investors, but if you have a 401(k) or an Individual Retirement Account, you have the power to leverage your portfolio to reflect your values. 

And the companies we use to help manage our investments are increasingly aware of this. "We're here, first and foremost, to help people make money and secure their retirement," said Boris Khentov, Betterment's Head of Sustainable Investing. "And now we're at the point where we can do that successfully and responsibly by integrating their values into their portfolios." 

Here's an overview of sustainable investing and how to become a more sustainable investor.

What's sustainable investing and what does it mean for your portfolio?

Sustainable investing originated in the 1960s, when consumers began to exclude businesses with unethical involvements from their portfolios. A sustainable investment focuses not only on financial returns but also on positive environmental and social impact. 

Total assets held in sustainable investments have increased 25 fold since 1995, and Bloomberg analysts predict the asset class will shoot to $53 trillion in the next four years. Though sustainable investing practices have faced doubts about financial performance, studies have shown that sustainable funds provide returns in line with comparable traditional funds while reducing downside risk. In fact, in 2020 sustainable funds outperformed nonsustainable portfolios

What makes an investment 'sustainable'?

The most common criteria involves a corporation's environmental, social and governance metrics (often called ESG). For example, environmental considerations could include measuring a firm's carbon emissions, water use or waste management practices. 

It's important to note, however, that there's no official metric or governing body that determines, audits or validates a firm's reported ESG ratings. Furthermore, performance may differ across ESG factors; a firm that makes progress against emissions goals could have less-than-ideal labor practices or a poor track record on employee diversity. 

How can you select sustainable companies to invest in?

Many financial advisors and investment managers have sustainable investment options. Personal Capital offers a Socially Responsible Investment portfolio, and Fidelity offers a collection of funds including the Climate Action Fund, Environmental Bond Fund, Water Sustainability Fund and Environment and Alternative Energy Fund. Charles Schwab's self-management feature lets you choose from a range of sustainable mutual funds and ETFs. 

If you're interested in getting further into the weeds, you can do your own research, starting perhaps with the annual best lists of top-rated ESG stocks and index funds. The Forum for Sustainable and Responsible Investment publishes a Mutual Fund and ETF chart, that aggregates sustainable funds that feature companies that report relatively modest carbon footprints or invest in climate friendly projects.

How can financial advisors help?

If you don't want to select individual funds, experts can help you choose sustainable investments. There are advisors who specialize in environmentally friendly investments and an array of robo-advisors that offer sustainability focused investments. For example, Betterment offers climate-specific funds that focus on fossil fuel divestment and promoting shareholder engagement. Aspiration's Redwood Fund also invests exclusively in funds that are fossil-fuel-free.

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