How Ethical Investors Build Sustainable Portfolios
An investor’s desire to support companies that positively impact society can lead them to develop an ethical or sustainable portfolio. Such investors typically focus on reducing the negative impact of their portfolios by focusing on companies, industries, and geographies deemed more ethical. However, maintaining such a portfolio requires more than just avoiding negative-impact investments. Investors must also be exposed to high-quality businesses with strong growth potential and good management teams. This article explores how sustainable investors build their portfolios to outperform the market while upholding their own standards of ethics.
Selecting companies to include in your ethical portfolio
Ethical investors typically target above-average total returns while ensuring that their sustainable portfolios have a positive social or environmental impact. To do that, ethical investors must first select companies to include in their portfolios. This can be a challenging task since there is no industry that is 100% ethical. Therefore, ethical investors must choose companies carefully, ensuring they represent a balanced portfolio.
Maintaining portfolio exposure within an ethical mandate
Once you’ve selected companies to include in your ethical portfolio, you’ll want to ensure that you maintain exposure to each company within your ethical mandate. This will help you avoid having any one company take up too much of your portfolio, which could lead to you taking excessive risk. One way to manage your portfolio’s exposure to each company is to use an asset allocation chart. An asset allocation chart is an organizational tool that can help you visualize your investment plan. It can also help you identify potential risks and opportunities associated with your asset allocation and portfolio.
Mapping out your asset allocation
When you select companies to include in your ethical portfolio, you’ll need to decide how much of your portfolio to invest in each company. SRI portfolio managers often maintain a relatively high level of diversification. That way, they can benefit from the positive impact of all types of companies while mitigating the potential negative impact of any one company. Therefore, SRI portfolios tend to be more diversified than conventional sustainable portfolio. An ethical investor may choose to invest in a more diversified portfolio than a conventional one. Ethical investors typically invest in a diversified portfolio with no single company taking up more than 5% of their total portfolio.
Finding quality investments within your risk appetite
Ethical investors have the same goal as all other investors: they seek to acquire a high-quality investment portfolio that provides an adequate rate of return. Ethical investors, however, typically have slightly different risk appetites than conventional investors. Ethical investors may place greater importance on long-term investment horizons and a desire for their sustainable portfolio to positively impact society. As a result, ethical investors tend to invest in stocks with higher valuations than conventional investors. Ethical investors also tend to invest in smaller companies, which are less liquid and come with higher risk-adjusted returns.
Ethical investing has become increasingly popular among individual investors. Ethical investors typically increase their focus on investment selection, portfolio construction, and asset allocation to ensure their portfolios positively impact society. Ethical investors can choose from a variety of investment strategies. They can also invest across industries and geographies but exclude specific types of companies, industries, and geographies.