Why and How You Should Invest Sustainably
It is worth investing sustainably not only for ethical reasons. This is because sustainable investments can also generate returns that are almost as high as those from traditional investments and can even reduce risk. Here is what you need to consider when investing your money sustainably.
Investing sustainably means assessing investments based on more than just potential risks and returns. Such investments are also evaluated based on environmental, social, and ethical factors, such as corporate policies. These factors are also known as environmental, social, and governance (ESG) criteria.
These criteria are usually implemented to varying degrees by companies. For example, some "green" investments particularly focus on environmental protection, while other responsible investments fall more under the social segment.
Sustainable Investments Are in No Way Inferior to Traditional Ones Return-wise
It is often claimed that sustainable investment involves smaller prospective returns. But this is not always the case, as shown by the German Natur Aktien Index (NAI), or “Nature Share Index”, which includes 30 companies, selected by experts, that fulfil sustainability criteria.
According to data from financial website boerse.de, the NAI has generated an average annual return of 14.9% over the past five years. In comparison, the Deutscher Aktienindex (DAX) came in slightly higher at 21.0% during the same time period. On the other and, the Swiss Market Index (SMI) only had an average return of 12.9%.
Although past performance is no guarantee of future results, this demonstrates how well sustainable investments measure up against traditional investments in terms of return. Generally, alternative investments even perform slightly better when there is risk.
Sustainable Investment Excludes Risky Sectors
Investments that do not meet basic ESG criteria are often controversial and are thus considered to be particularly risky. Sectors such as nuclear power or the tobacco industry may often fall short when assessed individually. This is why excluding investments that are not sustainable generally reduces the risk of large losses.
Despite this, sustainable investment is obviously not without risk. For example, it is still much riskier to invest in a small startup than in an established company – even if the new company's founders work responsibly.
Sustainable Investing: Three Major Approaches at a Glance
A popular approach for selecting sustainable investments is based on exclusion criteria. This involves excluding any investments that do not meet certain environmental, social, or ethical criteria. Furthermore, the exact reasons for exclusion can be determined by your personal values as an investor or by prescribed national and international standards. For example, it is possible to exclude all investments in companies that tolerate inhumane working conditions, manufacture weapons, or are involved in nuclear power.
The best-in-class approach is also frequently applied to sustainable investment. Under this method, you actively focus on sustainable investments instead of excluding investments. You choose companies that excel at implementing ESG criteria within their sectors. Thus, such companies may place a particular emphasis on minimizing their consumption of resources. Or they may be exceptionally committed to treating their employees fairly.
Impact investing is another approach, which primarily focuses on social and ecological aspects as well as returns. This could allow you to invest sustainably to help disabled people. Or with your investment you could support small business owners in developing countries – for example, via microfinance.