Understanding the pros and cons of sustainable investing (2024)

Want your investments to align with your values? Understand the pros and cons first.

by Cameron Huddleston

April 29, 2020| Money

Understanding the pros and cons of sustainable investing (1)

April is Earth Month, and this year’s was extra special as it included the 50th anniversary of Earth Day. The annual event was launched in 1970 by U.S. Senator Gaylord Nelson as a nationwide teach-in. Back then, an estimated 20 million Americans took to the streets to draw attention to environmental disasters and to demand action to protect the Earth. This year’s efforts were understandably more muted, and yet the environmental crisis is more urgent than ever.

Fortunately, there are plenty of ways that you, as an individual, can have an impact through responsible investment decisions. One of those ways that you might not have considered is socially and environmentally responsible investing—essentially, using your dollars to support sustainably-minded businesses, while withdrawing investment funds from those who are damaging the planet.

Of course, if sustainable investing were as simple as that sounds, everybody would be doing it. But investing—already a complicated thing—in a way that’s socially responsible takes time and effort. You’re in the right place to start, though, with this guide to what environmentally responsible investing is, and what the pros and cons are.

In this article:

    What is environmentally responsible investing?

    If you search for “environmentally responsible investing,” the results likely will show a whole slew of other terms ranging from green investing to socially responsible investing to sustainable investing. The latter – sustainable investing – is the most commonly used term, but it doesn’t have a widely accepted definition, says Henry Shilling, director of research at Sustainable Research and Analysis.

    “Practitioners in this space agree there are several different approaches to achieving sustainable investing,” Shilling says. Those can be boiled down to four main approaches.

    Values-based investing

    This strategy involves choosing investments for your money that align with particular religious, ethical or social beliefs. Typically, values-based, socially responsible investing entails screening out companies or sectors – such as companies that produce alcohol, tobacco or firearms.

    Impact investing

    This approach involves achieving a measurable social or environmental impact with your investing. For example, it could include investing in companies that promote gender equality in the workplace or seek to reduce greenhouse gas emissions.

    Thematic investing

    This strategy is similar to impact investing. It targets specific areas such as, say, investing in alternative energy sources, but it doesn’t necessarily involve achieving measurable outcomes.

    ESG investing

    Shilling says that ESG is the fastest-growing approach to sustainable investing. It takes into account companies’ environmental, social and governance practices. As an investor, it’s important to be aware of these distinctions. These ESG factors will come into play as you weigh your sustainable investment options.

    Understanding the pros and cons of sustainable investing (2)

    Get our newsletter

    There’s more great content where this came from.

    Ways to invest: stocks vs. funds

    One way to ensure that your money is being invested in a way that supports environmental causes is to buy shares of companies that align with those causes. For example, if you support clean energy, you might want to purchase shares of a solar panel manufacturer.

    However, picking stocks on your own might not be the best option if you’re new to investing. “For investors who are starting out, they may be better off relying on professional fund managers to build a core portfolio then work their way out from there,” Shilling says. That means buying mutual funds rather than individual stocks.

    Mutual funds invest in a variety of stocks, bonds or other assets. The assets are chosen by professional fund managers based on the goal of the fund. As an investor, you can buy shares in a mutual fund and get instant exposure to several companies. That can help lower your risk because all of your money won’t be tied up in the fate of just one company.

    In addition to actively managed funds, there are exchange-traded funds and index funds — both of which track the performance of a market index such as the S&P 500. However, ETFs typically have no or low minimum investment requirements, so they can be a more affordable way to start investing. They also trade on the stock market, so the price can go up or down during the day. Index funds only trade once a day.

    There are almost 1,000 mutual funds and ETFs that pursue a sustainable investing strategy, Shilling says. Many of the large investment firms – including Fidelity Investments, Morgan Stanley and Vanguard —– offer sustainable funds. “This is probably a time when investors have more options in the sustainable investing space than they’ve ever had before,” he says. “On the one hand, it’s a good time for investors because they have more options. At the same time, they have greater challenges sorting through the options.”

    How to choose investments that align with your values

    Before sorting through all of the socially and environmentally responsible investing options, Shilling says you need to get clear on what your values and investing goals are, especially because there aren’t standardized definitions and classifications for sustainable funds.

    For example, one fund might be labeled as “clean energy” because it focuses exclusively on alternative energy companies. And then a second fund might also be labeled “clean energy” because it, too, focuses on alternative energy companies—and yet it might also work with companies that are then involved in the distribution of fossil fuels. “Even when you think a term like environmental will isolate funds that will focus on that attribute, the funds themselves might approach environmental considerations in different ways,” Shilling says.

    In short, you can’t rely on the fund name alone. So what’s an environmentally responsible investor to do?

    Review the fund’s objective for sustainable investment practices

    Mutual funds are required to issue a prospectus with detailed information about the fund. Often, you can download a copy of the prospectus by visiting a fund’s website, or you can find current holdings in the fund’s most recent annual or semi-annual report. The prospectus will include an investment objective and the types of securities it invests in, which you should review to see if the objective and holdings align with your values. You should also consider the fund’s risk profile to ensure it’s consistent with your risk tolerance.

    Review the fund’s performance

    Check the average return of the fund over varying periods of time to see how it performed, and compare that performance to an appropriate benchmark — such as the S&P 500 or Dow Jones Industrial Average. You can find performance information in a fund prospectus, or you can use the Financial Industry Regulatory Authority’s Fund Analyzer. You don’t want to choose a poorly performing fund just because it aligns with your values.

    Review fund fees

    Mutual funds have a variety of fees, including fees to cover the costs of operating the funds. The higher the fees, the more they will eat into the fund’s returns. You can compare the fees for sustainable funds by using FINRA’s Fund Analyzer. Search by fund name or symbol, and the Fund Analyzer will show how its fees compare with fees of similar funds.

    Understanding the pros and cons of sustainable investing (3)

    Life insurance is more affordable than you think

    Get your free quote

    The tradeoffs of environmentally responsible investing

    There can be some drawbacks to aligning your investments with your values. For one, the fees for sustainable funds tend to be slightly higher on average than for conventional funds, Shilling says. “But within that group, it is possible to identify funds that are attractively priced,” he adds.

    It also can be difficult to gauge the performance of these investment funds because many have only been around for a couple of years. For example, “Some reports would lead you to believe that these funds have been performing better in this market downturn,” Shilling says. One reason some of these funds have performed well lately is because they don’t invest in traditional energy companies, which have seen their shares fall significantly lately. (Negative oil prices, anyone?) Sustainable funds’ recent performance might not be an indication of how they’ll perform over the long-term.

    Plus, if you’re only investing through a 401(k) or workplace retirement fund, you might not have access to environmentally responsible funds. That’s because 401(k) plans have been slow to offer these types of funds as investment options, Shilling says.

    If your workplace retirement plan doesn’t include any sustainable fund options, let your employer or human resources department know that you’d like to see these sorts of funds added to your investment options. “As more employees express an interest in something like this and as more options become available, you’re going to see an increasing adoption rate with 401(k) plans,” Shilling says.

    Is environmentally responsible investing worth it?

    You might be wondering whether this type of investing is worth the potential trade-offs. After all, it might not seem that you’re making much of a difference as an individual investor by opting for shares of environmentally responsible companies or sustainable funds.

    However, your investment choices do have an impact, Shilling says. “You’re making a statement that you care,” he says. “By expressing that care and concern in the way you allocate your money, you’re sending a signal to the investment community.”

    Over the long term, increased demand for sustainable investments can lead to the creation of more funds that focus on companies that are making a positive environmental impact. That, in turn, could drive more companies to take on the mandate of improving the environment through sustainable efforts.

    Understanding the pros and cons of sustainable investing (4)

    Why Haven Life?

    The answer to that question is easy (which is exactly how Haven Life makes applying for term life insurance)

    Learn more

    Understanding the pros and cons of sustainable investing (5)

    About Cameron Huddleston

    Cameron Huddleston is the author ofMom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Forbes, MSN, Yahoo and many more print and online publications. U.S. News & World Report named Cameron one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named me one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, MSNBC, CNN and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR and more than 30 podcasts. Cameron has also been interviewed and quoted as an expert in The New York Times, Chicago Tribune, BBC.com, MarketWatch and more.

    Read more by Cameron Huddleston

    Our editorial policy

    Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

    Our editorial policy

    Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

    Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

    Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

    Our disclosures

    Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

    MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

    Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus

    You might also like

    • Money

      How to save money on holiday travel

      Whether you’re planning an international vacation or taking the kids to see their grandparents, here’s how to book the best possible trip

      Read more

    • Money

      5 common money squabbles for married couples, and how to address them

      How to handle common money fights before they ruin your relationship

      Read more

    • Money

      How to start investing in your 20s

      Whether you’re simply looking to put money aside or already planning for retirement, here’s what you should know

      Read more

    • Money

      4 must-read retirement planning books

      Overwhelmed by retirement planning? These books can help

      Read more

    What our customers are saying

    • Oct 2, 2023

      Super impressed

      Super impressed. Application was easy, fast, and user friendly. Pricing competitive and came back quickly. Customer service was quick and helpful.



    • Sep 8, 2023

      User friendly platform and very easy…

      User friendly platform and very easy application process! Super content with Haven Life , consider them when shopping for a policy.

      –Gabby Santos


    • Aug 11, 2023

      Great Experience

      The ease of the process and speed in getting my application approved was terrific. Highly recommend using them for your insurance needs.



    • Aug 10, 2023

      Simple and well-designed process for buying life insurance

      Life insurance is an industry that seems stuck in the past - things like completing an application, filling out paperwork, scheduling medical exams, etc. are not handled online at many companies. At Haven Life all of this can be done and tracked online, and I hope that others in the industry will follow suit. Other positives include that pricing was competitive and easily available through an easy online quote. It was also possible to adjust the specifics of the policy throughout the process, even after underwriting was complete - changing my mind on one small detail did not require restarting the process. The underwriting process proceeded quickly. I was easily able to gain access to my lab results online. Etc. The process was easy at every step.



    • Jul 27, 2023

      5 STARS!⭐️ ⭐️⭐️⭐️⭐️ They made everything…

      5 STARS!⭐️ ⭐️⭐️⭐️⭐️ They made everything simple, seamless and positive.

      –Kayla Counselbaum


    As an enthusiast and expert in responsible investing, I've delved deep into the complexities of environmentally responsible investing (ERI). My extensive knowledge is rooted in a comprehensive understanding of various sustainable investing approaches, including values-based investing, impact investing, thematic investing, and ESG (Environmental, Social, and Governance) investing.

    The article by Cameron Huddleston, "Want your investments to align with your values? Understand the pros and cons first," is a valuable resource for individuals seeking to make socially and environmentally responsible investment decisions. The article highlights key concepts and considerations in the realm of ERI.

    Concepts Explored in the Article:

    1. Earth Month and Environmental Crisis:

      • The article introduces the context of Earth Month, emphasizing the environmental crisis's urgency despite the more subdued celebrations.
    2. Responsible Investment Decisions:

      • It proposes the idea that individuals can contribute to positive change through responsible investment decisions.
    3. Types of Sustainable Investing:

      • The article identifies four main approaches to sustainable investing:
        • Values-based investing: Aligning investments with religious, ethical, or social beliefs.
        • Impact investing: Seeking measurable social or environmental impact.
        • Thematic investing: Targeting specific areas such as alternative energy sources.
        • ESG investing: Considering companies' Environmental, Social, and Governance practices.
    4. Investment Vehicles:

      • The distinction between individual stock picking and investing through funds (mutual funds, ETFs, and index funds) is explained. The advantages of fund investments, especially for beginners, are emphasized.
    5. Availability of Sustainable Funds:

      • The article mentions that many large investment firms, including Fidelity Investments, Morgan Stanley, and Vanguard, offer sustainable funds. The growing options in the sustainable investing space are acknowledged.
    6. Choosing Investments aligned with Values:

      • Investors are advised to clarify their values and goals before exploring socially and environmentally responsible investing options.
      • Factors to consider when evaluating funds include the fund's objective, performance, and fees.
    7. Drawbacks of ERI:

      • Higher fees for sustainable funds are acknowledged as a potential drawback.
      • The challenge of assessing the performance of these funds, especially those with a limited track record, is highlighted.
    8. Inclusion in Retirement Plans:

      • The article notes that 401(k) plans may not always offer environmentally responsible funds, and investors are encouraged to express interest in such options to drive adoption.
    9. Long-Term Impact of ERI:

      • Despite potential trade-offs, the article suggests that individual investment choices do have an impact by signaling care and concern, potentially leading to increased demand for sustainable investments.
    10. Author's Background:

      • The article is written by Cameron Huddleston, an award-winning journalist with over 18 years of experience in personal finance. Huddleston's expertise adds credibility to the information presented.

    In conclusion, this article serves as a comprehensive guide for individuals interested in aligning their investments with their values, providing insights into the diverse facets of environmentally responsible investing.

    Understanding the pros and cons of sustainable investing (2024)
    Top Articles
    Latest Posts
    Article information

    Author: Jerrold Considine

    Last Updated:

    Views: 6086

    Rating: 4.8 / 5 (78 voted)

    Reviews: 85% of readers found this page helpful

    Author information

    Name: Jerrold Considine

    Birthday: 1993-11-03

    Address: Suite 447 3463 Marybelle Circles, New Marlin, AL 20765

    Phone: +5816749283868

    Job: Sales Executive

    Hobby: Air sports, Sand art, Electronics, LARPing, Baseball, Book restoration, Puzzles

    Introduction: My name is Jerrold Considine, I am a combative, cheerful, encouraging, happy, enthusiastic, funny, kind person who loves writing and wants to share my knowledge and understanding with you.