The ins and outs of sustainable investing
Sustainable investing might be hugely popular – but what does it mean exactly? Before you invest, make sure you know how to make the biggest impact with your money.
4 min read
Thanks to a wealth of investing information available online and on social media, more young people than ever are finding ways to grow their money. But, as environmental uncertainty increases, many want their investments to not only turn a profit but also to contribute to positive change. As a result, sustainable investments have become a popular choice, growing by 15% in just two years.
However, the field of sustainable investing is anything but straightforward. Before you jump in, it’s essential to educate yourself and make sure you know how to spot trustworthy sustainable investment funds — so you can actually create a meaningful impact with your money.
The growing trend of sustainable investing
Sustainable investing is an investment strategy that not only takes a company’s profits into account, but also considers its environmental and social impact. Put simply, sustainable investing has two main goals: short-term financial gains and long-term global impact. By investing in greener companies, investors use their money as a proxy vote for the type of future they want to see. Each cent put into a sustainable investment fund is — at least in theory — one cent fewer that isn’t going towards fossil fuel-backed companies and industries.
Over the past few years, sustainable investing has become more than just hype. Investments in sustainable funds have increased tenfold since 2018 and 25-fold since 1995. Thanks to their environmentally-conscious values, Millennial and Gen Z investors are leading the way with sustainable investments with close to 66% of Millennials and 82% of Gen Z investing in ESG-compliant investments.
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So what’s ESG?
ESG stands for Environmental, Social, and Governance. Sustainable investment funds are evaluated according to their impact in these three categories. While the environmental factor looks at a company’s carbon emissions, water and electricity usage, and waste, the social category takes into account societal impact, including community engagement and stance on social issues. Meanwhile, governance considers how effectively a company is structured to realize positive change. This involves assessing the diversity of its management board, its transparency, corruption policies, and political donations and contributions.
Sustainable funds often focus on one, or a combination of, these three ESG criteria. For example, some funds include a mix of companies that score highly in either the environmental or governance categories, whereas others focus specifically on socially-impactful companies. The big caveat to ESG is that it isn’t currently regulated. ESG ratings are granted by third-party organizations, but there aren’t any consistent international evaluation standards. Unfortunately, that leaves the door open for some cunning companies to attract investors by marketing themselves as much more sustainable than they are. This is known as greenwashing.
The trap of greenwashing
As interest in sustainable investing has grown, so has the desire for companies to position themselves as ESG-compliant – whether they actually are or not. Without any international ESG regulations, it’s easy for funds and companies to create the illusion of being sustainable. In 2021, The Economist discovered that the world’s 20 largest ESG funds all invested in fossil-fuel producers and many also invested in gambling, alcohol, and tobacco. This is a real problem for investors who want to make a positive impact with their money.
But, there are a few things investors can do to suss out if an investment fund is as sustainable as it claims to be:
- Find out which organization presented the fund with its ESG rating and research if this third party is a trustworthy source.
- Read the fund’s prospectus. This is where you’ll get all the detailed information about the fund — and it’s more meaningful than reading a fund’s brochure, which is essentially just an advertisement.
- Look at all of the companies included within an ESG fund. This will give you a feel for how sustainable the entire portfolio is — any companies that rely heavily on fossil fuels are a big red flag.
Deciding what sustainability means for you
Due to the lack of standardization across sustainable investment funds, the most important thing you can do as an investor is to figure out what sustainability means for you. For some, creating a fair and equal society is the primary driving force for a sustainable world. This could mean investing in companies that champion gender equality and support LGBTQ communities. For others, innovation is the key to reducing global carbon emissions and creating a sustainable future. This could look like investing in green tech startups that aim to tackle climate change with technological solutions.
Ultimately, you can only make informed decisions based on the quality of the information you are given. Choosing to make a positive impact with your money is fantastic, and a leap of faith is required when making any sort of investment. There are many great, sustainable companies and funds out there trying to do good in the world — it might just take a little bit of work and research to find them.
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