It’s no secret that thoughtful investors are increasingly seeking ways to align their investments with their worldview.
And, to its credit, the financial services industry has responded with a steady stream of carefully-designed ETFs and mutual funds aimed at this expanding universe of socially conscious investors.
These important products can, of course, enhance any personal portfolio with the addition of environmentally sustainable investments.
But more than that, impact investing vehicles can provide a way for investors to earn returns and make a difference in the environment through their retirement accounts.
Investing for more than one future
Whatever you call the category—environmental, social, and governance (ESG), socially responsible investing (SRI), or sustainable investing—several investable products are now available providing investors a distinct way to take a stand on environmental issues that matter to them, perhaps to us all.
To do well for their portfolios, in other words, while doing good for their values.
But given the size and complexity of the global economy, can this sort of idealism make a difference in anything beyond a portfolio’s asset value?
Simple answer—absolutely. Here’s why:
All of us alive today were born into a world where things like fossil fuels and forest clearcutting were standard practice. And, on the whole, we’ve gone through our daily lives participating in and perpetuating this inherited norm.
We have collectively behaved as if there is no connection between how the economy works and how we allocate our resources.
Now, confronted with a climate crisis, we’re starting to ask ourselves, “What’s the way out?”
Improbable though it may seem, there is a way out. We can change it all. We can update our image of what the economy is and how it can work. We can set up the economy to work indefinitely without us cooking ourselves, destroying our water and our topsoil, and causing the extinction of other species.
We can realize that economy simply by stopping doubling down on our dirty, legacy technologies and instead embracing innovation. We need merely to update our prior assumptions about how things can and should work, and then invest with that new understanding in mind.
A natural fit
Against this backdrop, and as climate warnings become more dire, investors are becoming increasingly interested in climate change-related investments.
Indeed, what may have started out as a bit of a Wall Street niche has become a much broader and more critical investment strategy for a wide range of investors, most notably, it seems, millennial investors looking to build a sustainable nest egg.
Regardless of age, the pursuit of impact investing in a 401k plan has to do more than just “feel” rewarding—it has to make financial sense.
After all, the point of a retirement account is to fund one’s retirement. We’ll be the first to say that impact investments should not be held to a lesser standard than any other investment in a retirement portfolio.
More than that, we’re willing to suggest that innovative responses to the world’s greatest system-level threats, like the climate crisis, resource degradation, and pandemics, provide real opportunities for very competitive investment performance over the long term.
It’s reasonable to think the positive prospects for carefully selected innovation and technology investments line up particularly well with the longer-time horizon of many 401k plans.
The good news for 401k plan participants in today’s market is they don’t have to choose between strategies that align with their investing goals and funds that actually make money.
The Shelton Green Alpha Fund (NEXTX), for example, which invests in companies representing the green economy, has consistently outperformed its benchmark, the MSCI ACWI Index, from the fund’s inception in 2013.
“We’re not just predicting the future, we’re causing the future,” mathematician Cathy O’Neil said. Allocating investments to the next economy is the best way we can think of to affect the kind of future we seek—and build a little wealth along the way.
You really can do well for your retirement nest egg and help make a positive difference at the same time.
Garvin Jabusch is Co-Founder and Chief Investment Officer of Green Alpha Advisors.