InSight

Embracing Sustainable Investing for Risk Management and Positive Impact

Financial Planning Dentist

In recent years, sustainable investing has gained significant momentum as investors increasingly recognize the importance of aligning financial goals with sustainability principles. While the pursuit of financial returns remains essential, a growing number of investors are incorporating risk management into their investment strategies through the lens of investment altruism. In this blog post, we will explore how investment altruism contributes to risk management while driving positive social and environmental impacts.

Understanding Investment Altruism and Risk Management

Investment altruism, also known as impact investing or sustainable investing, combines financial objectives with measurable positive social and environmental outcomes. By embracing this approach, investors actively seek opportunities that address sustainability challenges, mitigate risks associated with unsustainable practices, and contribute to a more sustainable future. Sustainable investing offers a risk management framework that goes beyond traditional approaches by evaluating risks through the lens of environmental, social, and governance (ESG) factors.

Mitigating Environmental Risks

Climate change and environmental degradation pose significant risks to businesses and investments. Sustainable investing aims to identify companies and projects that adopt environmentally responsible practices, reducing exposure to climate-related risks, resource scarcity, and regulatory changes. By integrating ESG criteria into investment decisions, investors can gauge a company’s environmental performance, including its carbon emissions, water usage, and waste management. Investing in environmentally conscious companies helps build resilience and reduces vulnerability to environmental risks, thus safeguarding portfolios in the long run.

Addressing Social Risks

Social risks, such as labor practices, community relations, and supply chain management, can have a profound impact on a company’s performance and reputation. Investment altruism encourages investors to consider a company’s social impact and its commitment to ethical business practices. By incorporating ESG factors into their analysis, investors can identify companies that prioritize employee well-being, diversity and inclusion, human rights, and community engagement. This proactive approach helps mitigate social risks, build trust with stakeholders, and protect the long-term value of investments.

Enhancing Governance Practices

Effective governance plays a vital role in mitigating risks and ensuring sustainable business practices. Sustainable investing assesses a company’s governance structure, board diversity, executive compensation, and transparency. By investing in companies with strong governance practices, investors can reduce the risk of fraud, corruption, and unethical behavior. Robust governance frameworks enhance accountability, safeguard shareholder rights, and contribute to the overall stability and long-term success of investments.

Long-Term Value Creation

Investment altruism aligns with the concept of creating long-term value by integrating sustainability into investment strategies. By investing in companies that embrace sustainable practices, investors contribute to the development of resilient and forward-looking businesses. These companies are better positioned to adapt to evolving market trends, regulatory changes, and customer preferences. Sustainable investments have the potential to outperform their peers in the long run, as they are better prepared to navigate risks, seize opportunities arising from sustainability megatrends, and deliver sustainable financial returns.

Collaboration and Knowledge Sharing

Investment altruism thrives on collaboration and knowledge sharing among investors, corporations, policymakers, and civil society organizations. Collaborative platforms and networks facilitate the sharing of best practices, research, and insights on sustainable investment strategies. By actively engaging in these collaborations, investors gain access to a wealth of information, expand their networks, and enhance their risk management capabilities. Collectively, these efforts drive progress toward a more sustainable and resilient investment landscape.

Investment altruism, with its focus on sustainable investing, offers a risk management framework that goes beyond traditional approaches. By considering environmental, social, and governance factors, investors can mitigate risks associated with climate change, social issues, and governance failures. Additionally, sustainable investments contribute to long-term value creation, as they align with market trends, customer preferences, and regulatory shifts. By collaborating and sharing knowledge, investors can strengthen their risk management capabilities and collectively drive positive change toward a more sustainable and resilient future. Embracing investment altruism not only offers financial benefits but also empowers investors to make a meaningful impact on the world.

 

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How to Survive a Bear Attack? (Pt. 2)

Don’t Discard your Strategy During a Recession We own stocks for a very deliberate reason. These equities are inflation resistant, generate cash, and the good companies grow at a rate faster than the economy they are a part of. They change prices wildly in a recession as people try to determine the long-term value of those features, but at the end of a recession, it is the only asset class that will be worth more after the economic slowdown. Stock prices might be down, but that doesn’t mean you need to change the way you invest. Remember you own these assets for a reason. This thought process applies to both long-term and short-term investors, and retirees. Long-Term Investors Long Term investors have the most to gain from a recession. It is very likely younger investors have been buying stocks at historically high prices. Any investor that began building their portfolio after 2001 has only had three windows where the broad market was trading below its historical average. That’s right, with the exception of three small windows in the last 20 years investors have been “overpaying” for their exposure to the market. Long-term investors might see the next window opening before their eyes right now.  If you’re regularly adding funds to a long-term account, such as a 401(k) or IRA, don’t stop during a recession. That’s huge! If you place most of your money in stocks, don’t “chase performance” and sell out of them. They may be falling in price while bonds are rising in price. Don’t chase bonds, don’t chase life insurance schemes, and don’t try to buy and sell rapidly. Don’t change what you are buying for the long term, in favor of what you see in the short term. Take advantage of the discount in prices – and keep saving.  Short-Term Investors and Retirees Although you may be uncomfortable during a bear market, don’t be tempted to sell your stocks or stock mutual funds at a loss across the board. Make two things a priority, lower your risk, and focus on cash flow. This is a time to focus on quality investments, and pair down the speculative portions of the portfolio – this isn’t the market for moonshots. Begin by accepting that speculative bets might be lost forever and start looking for investments that will survive economic contraction.  If you need income right away, it would be best to have money set aside in cash and bonds before the downturn. That way, you can withdraw from your cash while you wait for stock prices to recover. Then look for investments that can safely replace the cash you need on an annual basis – bonds, real estate, and dividend stalwarts are the keys here. If you can create a cash balance, then you can keep your more speculative investments grinding through the economic slowdown. Ideally, if you are retired, you and your CFP® know what your annual need for cash is, and what investments and institutions are working to replace that cash as fast as it is used. Investing Before and During a Recession It’s easy to go wrong during a recession if you forget or don’t understand how certain investments perform during a downturn. Or how they are related to each other. The stock market is a forward-looking vehicle. Stocks represent your right to a company’s future cash flows. So when warning signs of a recession “hit” these are the most skittish assets and will react the most violently. This doesn’t necessarily mean these companies won’t survive the recession or even become better as a result. What it means is that the amount that other people are willing to pay for a company’s future earnings is lower. When the recession becomes a thing of the past, people will begin to overpay for earnings again, and this is where you want to be in a position to sell shares to those people.  Stock prices often fall months before a recession begins, which also means that they often bounce back up before the recession is declared over. You can miss an entire downturn if you only follow the news. That is why it is vital to know the signs of a recession and recovery, and how assets perform during those periods.  These are our general expectations of asset behavior during a recession: Stocks: Prices for stocks tend to fall before the downturn begins, often selling off even at the scent of a recession. Stocks are the most volatile and skittish, during a recession. But they also have the most to gain. 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How to “use” Depreciation and why it’s in your K-1?

How to “use” Depreciation: Basic Definition: Depreciation is a method used to allocate the cost of a tangible asset (like a building, machine, or vehicle) over its useful life. Since assets wear out or become obsolete over time, they lose value. Depreciation is a way to recognize this decrease in value on financial statements and for tax purposes. Simple Analogy: Imagine you buy a car for $20,000, and you expect it to last for 10 years. Each year, the car loses a bit of its value. So, instead of deducting the entire $20,000 from your income in the year you buy the car, you deduct a portion of it each year over the 10 years. This annual deduction is the depreciation expense. Depreciation in your K-1: What’s a K-1?: Schedule K-1 is a tax form used in the U.S. for partnerships, S corporations, and certain trusts. It represents an individual’s share of income, deductions, credits, etc., from these entities. If you invest in one of these entities, you receive a K-1 detailing your portion of the income or loss. Why Depreciation is Relevant: When a partnership (or similar entity) owns tangible assets like real estate or equipment, those assets get depreciated. This depreciation provides a tax deduction for the entity, thereby reducing its taxable income. If you’re an investor in that entity, your share of that depreciation appears on your K-1. On your personal tax return, this can offset other income, potentially reducing the amount of tax you owe. In simpler terms, depreciation on a K-1 represents your piece of a tax benefit stemming from the tangible assets the business entity owns and uses. This benefit can reduce your taxable income, which could potentially lower the amount of taxes you need to pay.   These are Typical Sources of Depreciation in the expenses of an investment: Furnishing and Fixtures Definition: These are movable furniture, fittings, or other equipment that are used in a business or home but are not integral to the building. Depreciation: Typically, these are depreciated over a 5 to 7-year period using the Modified Accelerated Cost Recovery System (MACRS) for U.S. tax purposes. Laundry Equipment: Definition: Equipment specifically designed for cleaning fabrics, such as washing machines, dryers, and ironing machines. Depreciation: Often depreciated over a 5 to 7-year life using MACRS. Computers: Definition: Electronic devices used to process data and perform tasks. Depreciation: Typically, computers are depreciated over a 5-year period using MACRS. Automobiles: Definition: Vehicles primarily designed for on-road use. Depreciation: Generally depreciated over a 5-year period using MACRS, but there are specific rules and limits, especially for passenger vehicles. Personal Property: Definition: This can refer to items that aren’t permanently attached to or part of the real estate. It could include machinery, tools, or other movable properties. Depreciation**: The period varies but often falls in the 3 to 7-year range, depending on the specific type of property and its use. Capital Improvements: Definition: Upgrades made to enhance the value of a property or extend its lifespan. This might include things like a new roof or an added wing to a building. Depreciation: The depreciation schedule depends on the nature of the improvement and what it’s related to. For example, if it’s an improvement to a building, it might be depreciated over 27.5 years (for residential property) or 39 years (for commercial property). Buildings: Definition: Structures like houses, office complexes, or warehouses. Depreciation: In the U.S., residential rental property is depreciated over 27.5 years, while commercial property is depreciated over 39 years using the straight-line method. Land Improvements: Definition: Enhancements to a piece of land, such as landscaping, driveways, walkways, fences, and parking lots. Depreciation: These are generally depreciated over a 15-year period using MACRS.    

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Everything You Should Know About UPREITs: Unlocking Real Estate Investment Potential

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