When building a portfolio of stocks, bonds, and other assets, most people think of asset allocation as the primary factor in deciding which investments to buy. The best way to allocate assets is by risk tolerance, investors say, and that means investing mostly in low-risk assets with high dividend yields, such as utilities and telecom stocks.
That’s what they think—but there’s another side to the story. Some of the world’s leading financial thinkers advise investors to consider more than just risk when allocating assets. Some of them go so far as to recommend that you build your portfolio around principles like ethics or sustainability rather than standard metrics like market capitalization and price-to-earnings ratios.
These arguments appear contradictory at first glance. But on closer inspection, these two schools of thought aren’t so opposed after all: Both approaches recognize that a great deal of value can be found outside standard metrics. Here’s how you can do it too.
Establish Core Principles
Ethical investing is not a rigid process but starts with a set of core principles and values that you hold most dear. Investors use them to decide whether any given investment is a good fit for them.
There are hundreds of ways to invest ethically and sustainably. As an investor, you can’t possibly know about them. Instead, you must focus on the principles guiding your investment decisions. That’s how you can build a portfolio that fits who you are and what you care about.
Look for Companies With a Social Conscience
One way to invest ethically is to look for companies with a strong social conscience. By “social conscience,” we mean companies dedicated to doing the right thing for humankind, the environment, and their investors.
Among the equity indices, the S&P 500 is the most often used benchmark for evaluating your investment performance. The S&P 500 is a broad index that includes the 500 largest companies by market cap in the United States.
You can find a list of the companies in the S&P 500, along with their ticker symbols, on the website of any major financial data provider like Morningstar or Yahoo Finance. Once you’ve identified the companies in the S&P 500 with a social conscience, you can proceed to include them in your portfolio.
Watch Out for Dark Corners in the Market
Not all markets are made equal. Some markets are less transparent than others, which makes them riskier for investors. Renewable energy, water, and agriculture are the most transparent markets for sustainable investing.
So, if you want to invest ethically, you could avoid investing in fossil fuel companies and instead put your money in companies that generate a significant percentage of their revenue from renewable energy sources.
You can’t just focus on risk if you want to build a portfolio with maximum long-term growth potential. You also have to consider how a company’s values and its approach to business affect its long-term success.
That’s because ethical investing is not just about avoiding the stocks of ethically objectionable companies—it’s also about seeking out and supporting companies with a strong social mission for the betterment of humankind.