In my last post, I described responsible investing broadly. I shared an orientation and some key definitions, a lay of the land, so to speak. We learned that there is no single approach to Responsible Investing, or a single term to describe it. Broadly, it’s an investment discipline that considers environmental, social and corporate governance to generate long-term competitive financial returns and positive societal impact (CITE). Given the broad range of approaches, it’s helpful to have a Guide. Luckily, I’m here to help.
Over the past few years, a dizzying number of investment products have emerged on the scene that cover every asset class. What does this mean? An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace. Depending on your goals, it’s good to diversify amongst these investments so you don’t put all your eggs in one basket, so to speak. Historically, the three main asset classes have been:
- Cash equivalent and money market instruments (think savings and checking accounts)
- Fixed income (things like government or corporate bonds)
- Public equity (investment in public companies that are listed, for instance, on the S&P 500)
There are other categories that many investment professionals include:
- Private Equity (private funds that invest in a variety of ways)
- Commodities (think oranges)
- Real property (think real estate)
- Cryptocurrency (think Bitcoin) – much more recent
In this and each of the subsequent posts, I’ll share some examples of investments that can be made in each of these categories.
I’ll start with cash and cash equivalents. In some ways, this category of asset allocation offers the most opportunity to incorporate impact into an investment portfolio. Have you ever thought about where your money is going while it’s parked in your checking or savings account? What about your business accounts?
Banks use deposits to make loans and investments for all kinds of projects. Depending on the bank, your money could be going to fund anything from small business loans or solar farms to financing for coal mining. Broadly speaking, environmentally and socially conscious banks make lending and investment choices that are better for people and the planet.
There is no single gold standard for banks, unfortunately (for the most part, banks aren’t legally required to disclose a lot of the negative impacts of their loans or formally disclose things like fossil fuel financing). However, there are a variety of banks and bank CDs in community-focused banks (called Community Development Financial Institutions, or CDFIs), as well as quarterly liquid funds that provide debt to social enterprises. And there are some voluntary approaches to track and rank banks that are doing good. A group called Mighty has done a lot of the work for us – they have a list of criteria to look for and lists of banks that are taking a leadership role on a variety of fronts – from promoting diverse leadership to eco-friendly lending practices.
Your homework? See if your bank (or the bank that houses your company’s accounts) is on this list. If it’s not, consider moving your money.
Bonus: another hot tip is to think about alternative credit cards along with your cash – often times you can get a credit card through your new bank. Here is a list of responsible credit cards compiled by Green America.
Let’s move some money for good! Next up: transitioning your fixed income portfolio.