What investors should know: Andrea Ferch, specialist for sustainable investing at LGT, explains the basics of sustainable investing.
A growing number of investors wants to achieve more than just a financial return with their investments – they also want to have a positive impact on people and the environment. For these people, the goal is often clear, but the concrete implementation may be less so. Some of the most common questions that arise in this context are: How do I invest my money sustainably? What needs to be taken into account? And what do ESG, SDGs and impact investing mean, exactly?
Here are some of the most important answers to questions about sustainable investing.
What is sustainable investing?
Sustainable investing refers to investment approaches that include non-financial aspects, so-called ESG criteria, in addition to traditional financial criteria when selecting and managing investments.
What are the SDGs?
The E stands for “environmental”; the S for “social”; and the G for “governance” – or ESG for short. These are the three pillars of sustainable investing, and should be taken into account if you want to invest sustainably.
ESG criteria have become established internationally in recent decades and are used by investors to conduct sustainability assessments. For a number of years now, the SDGs have served as another important point of reference for investors who want to invest sustainably.
What are the SDGs?
The 17 Sustainable Development Goals, or SDGs, are at the heart of the 2030 Agenda for Sustainable Development, which was launched by the United Nations in 2015. This global agenda aims to promote sustainable peace and prosperity and to protect our planet.
The 17 goals cover the three dimensions of sustainability – environmental, social and economic. The United Nations’ member states are expected to contribute to sustainable development in line with these goals. For investors, they provide a framework: they can evaluate the impact of investments on these 17 goals. This gives them transparency on the extent to which their investments have a positive impact on people and the environment.
Now that we’ve examined these terms, we can move on to the crucial question:
Generally speaking, investors have three investment approaches available to them:
1. Exclusions
2. ESG integration
3. Impact and thematic focus
Let’s take a closer look at what these approaches entail.
1. Exclusions: Avoiding the “villains”
With exclusions, investors avoid investments that have a significant negative impact on sustainable development. Investments that are incompatible with their personal values can also be excluded.
For example, investors can exclude investments in companies that manufacture controversial products such as weapons or nuclear energy. This approach can also be applied for companies whose business practices violate internationally accepted norms, for example because they are highly corrupt or cause massive environmental damage. Investors also have the option of applying exclusion criteria to countries, for example if they restrict freedom of the press and opinion, or are subject to sanctions.
2. ESG integration: Selecting investments with a high sustainability quality.
This approach is at the heart of sustainable investing, with the ESG criteria described above playing an integral part in investment decisions. These criteria are applied both in company valuations – when selecting equities and corporate bonds – and to country valuations – when selecting government bonds. By consistently taking ESG criteria into account when selecting securities, investors can achieve a high level of sustainability in their investments.
When investors select sustainable equities, the companies that end up in their portfolio are companies that conduct their business in an environmentally and socially responsible manner, for example because they have implemented effective measures to reduce their greenhouse gas emissions and adhere to high standards of occupational health and safety.
3. Impact and thematic focus: Making a positive contribution to society and the environment.
This approach is about selecting investments that have a positive social and/or environmental impact. In doing so, they contribute to overcoming global challenges and achieving the 17 SDGs. Sustainable investors select issues that are close to their hearts, such as climate protection or social well-being. They then invest specifically in companies whose innovative products and services have a positive impact on our climate or well-being.
These three approaches are the building blocks for sustainable investing. Many of the sustainable investment products available today use a combination of these approaches to pursue different objectives. Which of these three aspects they focus on depends on the financial product in question.
What options are available in the sustainable investing space?People who want to invest their money sustainably can, on the one hand, invest in individual stocks or bonds selected using any of the three approaches outlined previously. On the other hand, there is now also a large selection of funds and ETFs in various asset classes (equities, bonds or mixed funds) that have a sustainable investment policy.
In addition, investors can choose from funds and ETFs that focus on various sustainability topics – such as water, the circular economy or sustainable mobility – and that invest specifically in companies whose products and services contribute positively to the respective topic and the associated SDGs.
Investors who want to have a direct positive and quantifiable environmental and social impact should also consider what is known as impact investing. This often involves direct investments in private companies that are not traded on a stock exchange and whose innovative products or services have a significant, positive impact on people and the environment. Funds, so-called private equity impact funds, are also offered in this investment segment. They hold shares in a portfolio of these private companies and thus cover several topics and key sectors, such as renewable energies, sustainable agriculture or smart mobility.
In my opinion, if you want to invest sustainably, investment solutions in the form of a portfolio management or advisory mandate can be an attractive option. With a sustainable portfolio management mandate, investors select the sustainability profile that best suits them and decide which sustainability topics are particularly important to them.
How well do sustainable investments perform?
Skeptics claim that sustainable investing means sacrificing returns. In reality, though, taking ESG criteria into account can have financial benefits. Numerous studies in recent years have proven that the returns on sustainable investments are generally at least as good as those on traditional investments. Among these are studies from the University of Oxford and Arabesque, BMO Global Asset Management, Financial Service Provider MSCI and NYU Stern School of Business.
And the good news is that in the case of sustainable investments, investors can also achieve a positive return for people and the environment – meaning that they have the possibility of generating a positive return on two fronts.
