Clear advantages of sustainable investments!
Investing these days is by no means just about generating returns in this way. By investing your financial assets in various financial instruments, you indirectly express your consent to business and administrative practices as well as products from individual companies or in certain industries. While many investors still consider it unproblematic to invest exclusively in financial products that bring good returns, more and more investors want to expand their portfolio with securities, indices and ETFs from sustainable companies. In this guide, we will show you why such a sustainable investment makes sense.
Sustainable investment: general information
Sustainable investmentsare investments in securities, indices or funds with the aim of achieving social, ecological and economic changes and thereby generating a return. There are a number of societal challenges such as sustainable agriculture, renewable energies, nature conservation, affordable housing or generally available health care that need to be addressed. Overall, components of sustainable business practices were summarized under so-called ESG criteria (for the environment, social affairs and corporate governance). These meanwhile have a significant influence on the profitability of an investment. Because such criteria are used to to expand the conventional financial analysis of a company and to evaluate potential opportunities and risks in relation to the future viability of the entrepreneurial concept. The conformity with ESG criteria can be determined with the help of different procedures. Consulting companies usually take on this task and publish their results in the form of reports.
If the entrepreneurial concept corresponds to the ESG factors, it is evaluated according to positive criteria and labeled as «sustainable». Positive criteria are, for example, energy efficiency, equality or environmental protection. Investing in such concepts is called either SRI (socially responsible capital investments) or impact investing (impact-oriented capital investments).
If the company’s activity is classified as “unsustainable”, this means that it brings with it a number of negative criteria. Negative factors include in particular environmental pollution, social disadvantage of any kind or violation of the rights of shareholders. In this way, every investor can determine exactly whether the company is involved in ethically unacceptable business or is engaging in practices that conflict with ESG criteria.
Why invest sustainably: a summary of the different reasons
With sustainable investments you have the opportunity to contribute to the solution of central problems of mankind such as climate change, world hunger, poor health care or social disadvantage. The past has shown that these and other problems cannot be solved with government funding alone. But such challenges can also be seen as opportunities. Many studies show that companies working on solutions to today’s problems will be tomorrow’s economic winners. A large number of investments in sustainably oriented companies can already bring returns. By buying securities from such companies, you can not only positively influence their development,
Investment goals with social responsibility offer a useful addition and diversification of your portfolio. Some reports show that ETF funds that meet the ESG criteria are characterized by more stable growth than similar funds with negative factors. With sustainable investments you can specifically promote companies that act in an environmentally and socially conscious manner and develop sustainable concepts. Socially responsible investments are already changing the investment culture today. There are now numerous funds, ETFsand indices of companies that work exclusively on social and environmental change. You too can participate in this trend and, together with other investors, contribute to further increasing the impact of such investments. Further reasons for sustainable investment result from the fact that ethical investments are seen by experts as a carrier of social change that can contribute to significant improvements in our lives and in that of future generations.
Build a balanced investment strategy
Another way to clarify why sustainable investing can be effective is the fact that a portfolio of sustainable securities is instrumental in helping you develop a balanced investment strategy.
Based on different, sometimes cross-industry ESG criteria for ethical investments, you will be able to invest in a wide variety of financial products and companies. This not only enables you to minimize your risk, but also to achieve a very high degree of diversification. It is therefore not surprising that sustainable financial products are now one of the fastest growing segments on the stock market, with an annual increase in capital assets of more than 60%. Numerous executives in large companies have recognized the importance of social aspects for the future strategy and commission large consulting companies with their help to obtain a complete picture of the benefits and risks of ethically justifiable factors. This also led to a transparent presentation of sustainability criteria in corporate reporting. As an investor, you can now easily find out how much value a company places on, for example, energy-efficient technologies or equal rights for its employees, and whether such developments will help it generate income in the long term. It is therefore very important and inevitable to conduct intensive research when building your own socially conscious portfolio in order not only to take ecological and ethical factors into account, but also to develop a better understanding of the inner workings of a company or an industry. Because overall, the leading sustainable investment markets offer promising and future-oriented opportunities
Find new investment goals with screenings and evaluate companies
With sustainable investments it is possible to profit from a financial point of view as well as to be socially responsible. Using the procedures presented here, you can build an investment strategy that enables you to receive a dividend and act in a socially conscious manner at the same time. These are screenings or filter processes with a positive or negative effect. As part of an initial screening, you can first find those investment goals that meet the ESG or other social or ecological criteria or, with negative screenings, exclude certain companies with undesirable activities.
In this regard, the question of why sustainable investments make sense can also be answered. With positive screenings, new and profitable investment goals can always be found, which either come from a corresponding progressive industry such as renewable energy, or which stand out particularly when it comes to questions of equality or diversity. Such assessments are particularly extensive and are usually carried out several times. In this case, however, you can fall back on a number of indices or funds, which are updated several times in a certain period of time with regard to both positive and negative screenings. If a company receives negative results in the course of such analyzes, this may lead to that it is not only excluded from a corresponding index or fund, but that many shareholders can sell their shares. Sustainable investing is therefore an important mechanism for social feedback on corporate culture and business practices. Such shareholder activities have already enabled positive changes in the markets in the past.
So you can invest sustainably
If an investor believes that sustainable investments make sense, then they can invest in a number of different financial products, with the following instruments being among the most important:
When choosing the respective financial instrument, you proceed in a similar way to conventional investments. For example, there are a number of indices that depict companies that are directly involved in the production, development and sale of clean and environmentally friendly energy technologies. Such companies are included in the NASDAQ Clean Edge Green Energy Index, which includes a number of industry leaders that generate green energy. The Global Challenges Index, which was developed by the Hanover-Hamburg Stock Exchange, also lists a number of companies that set themselves the goal of combating climate change or taking various measures to promote the environment, such as securing the supply of drinking water over the long term. The Dow Jones Sustainability Index, in which the largest companies in the world that act according to economic, ecological and social criteria over the long term, are represented, is particularly attractive. Individual securities from these indices are also highly recommended for sustainable investments. Furthermore, a number of ETFs focus on companies that are particularly active in promoting human rights, pay performance-based wages and achieve equal rights for employees. Other ETFs like UBS who are particularly active in promoting human rights, pay performance-based wages and achieve equal rights for employees. Other ETFs like UBS who are particularly active in promoting human rights, pay performance-based wages and achieve equal rights for employees. Other ETFs like UBSMSCI World Socially Responsible ETFs exclude certain companies that come, for example, from the arms, nuclear power or gaming industries. In the meantime, many ethical ecological funds have been analyzed by various foundations such as Stiftung Warentest and have received corresponding ratings.
ETFs and their risk categories
Based on the fact that ETFs are among the most important financial instruments on the stock exchange that not only meet ESG criteria, but can also promise good prospects for a return, we will deal with them in more detail in this section. If we compare the returns of the sustainable ETFs with the conventional ones, then we find that the socially conscious representatives are hardly inferior to their counterparts. However, you may have to reckon with higher risks with sustainable ETFs, as they select companies according to positive criteria or exclude them according to negative criteria. In terms of their risk category, such ETFs are divided into three risk classes:
- speculative ETFs, which mostly focus on a single industry and enable offensive investment strategies;
- diversified ETFs, which are usually index-based and characterized by moderate growth;
Balanced ETFs with low growth
The iShares Global Clean Energy UCITS ETF, for example, focuses on companies that are active in the field of green or renewable energies. The ETF includes the 30 largest global companies that are manufacturers of solar or wind energy, for example. Since such funds usually only take into account a certain industry, they can be very volatile. The volatility of this ETF was more than 13%. The Vanguard FTSE Social forms the index of large and medium-sized American companies that have been checked for various ESG criteria such as human rights, working conditions or environmental protection. All companies are excluded based on negative factors. The volatility was well below 10%.
Nature Share Index (NAI)
An interesting representative from the field of indices is the Natur-Aktien-Index, which, due to its relatively strict sustainability concept, provides another answer to the question of why sustainable investing is relevant to society. The index initially excludes all companies in the context of negative screenings. This includes in particular companies that are involved in any form of discrimination, weapons production, but also in the use of genetic engineering. The remaining representatives take part in the positive screening. You have to meet at least two out of four sustainability criteria according to the NAI concept. Such positive criteria include:
Participation in the development of technologies that are potentially capable of solving mankind’s greatest problems. All companies that provide solutions for renewable energies or ecological cultivation would meet this criterion.
Industry leadership in industrial design or product quality. These include innovative providers of recycling technologies or energy-efficient products with an extended lifespan.
Industry leadership in production and sales management. In particular, all measures relating to environmental protection are increasingly taken into account here.
Strong focus on social equality and corporate governance. This is about promoting all forms of diversity or extended social benefits for employees.
This results in an international and cross-sector composition of companies, in which three quarters of the representatives have a turnover of more than 100 million USD and a quarter a lower turnover, with the former being preferred. In addition, companies must be able to generate profits in the long term. If the NAI criteria are no longer met, the respective company will be excluded.
Investments carry the risk of losses
Conclusion: sustainable investments also bring clear advantages
In summary, it can be said that there are a number of different reasons for sustainable investment. With such socially conscious investments many current problems of mankind like world hunger or climate change can be tackled effectively. In the meantime, there are first analyzes that impressively confirm that ethically justifiable behavior can also bring a return. Because in this way new industries are opened up and technological progress is promoted. This is directly reflected in the emergence of new financial instruments with which your portfolio can be expanded. This enables you as an investor to create a balanced investment strategy with stocks from sustainable companies. Such securities form the basis for a large number of ETFs or indices with ethically justifiable investment goals. Various ETFs with moderate growth are particularly promising in this context. The respective representatives are assessed on the basis of screenings and, if they meet the ESG criteria, included in the fund or, in the opposite case, excluded. In addition, new attractive investment targets can be developed with positive screenings.