Many parents choose to plan for their children’s future by creating an investment portfolio, but many dominant stocks and funds support causes that aren’t consistent with a sustainable future. This limits your options, but it can also help teach your children a valuable lesson – we don’t just invest in smart, successful companies, but in causes we believe are doing the right things in the world.
So how can you get your family involved in sustainable investing? Here are two key ways to enter this growing market.
One of the most popular modes of socially responsible investing (SRI) is based on opting out of the fossil fuel industry, a strategy known as divestment at the broadest level. First, divestment means pulling any money already invested in fossil fuels out of those stocks or funds. Then, investors need to place that money in other companies that share this commitment. It isn’t enough to skirt the issue of fossil fuels by avoiding directly supporting the industry. You should do your homework and find out what companies have also adjusted their portfolios in this way.
You may have a hard time separating your investments from fossil fuels because there’s so much money in the field, but as SRI grows in popularity, it should be easier to find pre-compiled lists of companies that are part of the divestment movement. Some financial advisors also specialize in SRI and can guide you through this process.
The ESG Framework
Another major model for sustainable investing is the environmental, social, and governance (ESG) approach, a framework that’s meant to identify industry leaders who show particular concern for the impact of their actions. This may mean demonstrating a commitment to environmentalism, transparency, diversity, and even tax policy. Such companies understand that social responsibility can provide a competitive edge in today’s market, and ESG has gained such popularity that even Goldman Sachs has developed ESG-focused tools.
The main issues underlying ESG-based financial decisions are simple enough for a child to understand, so don’t hesitate to discuss this investment strategy, even with young children. While your kindergartener may not be ready to understand the inner workings of a mutual fund, they already grasp why we take care of the earth and each other. You can also introduce the topic by discussing how some companies pay a lot of attention to taking care of the earth and the people and animals that live on it, while others don’t. This will lay the foundation for more complex conversations about social responsibility as your children grow.
Negotiating Custodial Accounts
As you develop an investing plan for your children’s future, you’ll have to create a custodial account that allows you to control their portfolio until they’re of legal age. Depending on how it’s structured, one or both parents’ names may be on the account, and it’s important to be clear about this issue. In the event of a divorce, you may need to consult a family lawyer who’s knowledgeable about financial issues to avoid common post-divorce disputes over who manages your children’s investments.
The face of investing is changing with the development of stronger social ethics, and it’s never too early to introduce these issues to your child. As they learn about money, give them opportunities to make commitments to social issues they care about and talk about how you’re saving money for them in ways that share a concern for the world they are growing up in.
Many parents think their children are too young to understand these issues, but SRI isn’t complicated – it’s an ethical approach to the future.