What is sustainable investment?

November 5, 2023

INDEX

In recent years, a new trend has emerged among investors, called sustainable investment. However, what is sustainable investment?

What criteria does it need to have to be considered “sustainable”?

And, above all, what assets are sustainable? In this article, we will answer all of these questions so you can start investing right away.

What does sustainable investment mean?

Sustainable investment means investing in assets that consider and follow specific principles directly related to protecting the environment, addressing social concerns, and practising good governance.

Also known as responsible investment, it involves seeking assets that offer competitive financial returns while also making a positive impact on the environment and society as a whole.

These assets include companies that aim to reduce their environmental footprint, engage in social causes like human rights, and establish governance rules that promote equality.

Sustainable or responsible investment can be approached in two main ways:

Negative screening: With this approach, investments exclude companies that do not respect the mentioned criteria.
Impact investing: This approach actively seeks out companies dedicated to environmental or social initiatives.

In essence, sustainable investment represents a shift from traditional investments in commodities like oil, gas, and other polluting products towards more environmentally and socially responsible options.

However, there can be confusion about what exactly defines sustainable investment.

What are the ESG criteria?

The concept of sustainable investment, based on ESG (Environmental, Social, and Governance) criteria, emerged in the 2000s within the framework of Socially Responsible Investment (SRI). However, this new investment philosophy goes beyond SRI, as it aims for a comprehensive transformation across all aspects of a company.

The ESG criteria are environment, society and good governance

So, Sustainable and Responsible Investment (SRI) is an investment philosophy that incorporates environmental, social, and good governance criteria (ESG) into the research, analysis, and selection of assets.

It goes beyond simple actions like reducing plastic usage and instead involves a comprehensive strategy that aims to reduce emissions, enhance transparency, promote equitable decision-making, and benefit the community.

What do the ESG acronyms mean?

But what do these ESG acronyms signify specifically? Let’s break it down:

The “E” stands for Environmental: Responsible investment includes assets connected to reducing pollution, respecting natural environments, and overall promoting environmental well-being.
The “S” stands for Social: Responsible assets involve companies that contribute to society’s betterment and are dedicated to improving their communities.
The “G” stands for Governance: Good governance is another critical aspect of sustainable investment. Responsible companies commit to transparency, uphold principles of fairness and equality, adhere to a code of conduct, and value diversity.

For instance, investing in companies with ESG criteria often involves renewable energy ventures.

What are the main sustainable industries to invest in?

It’s logical to assume that sectors closely tied to environmental concerns take centre stage in sustainable investment. However, these companies should also uphold social values and adhere to good governance principles.

For those interested in becoming responsible investors, here are some noteworthy sectors:

Solar energy

Solar energy, harnessed from sunlight and converted into electricity using solar panels, is a prominent industry in sustainable investment. You can invest in solar energy through ETFs, shares of solar panel companies, or even by installing solar panels for self-consumption in your own home.

Green hydrogen

Green hydrogen is a type of hydrogen gas that is made in a way that doesn’t harm the environment. The benefit of green hydrogen is that it can be used as a clean fuel, meaning it doesn’t produce harmful emissions when used. This makes it a good option for reducing pollution and fighting climate change.

However, it’s important to note that green hydrogen is still more expensive to produce compared to grey hydrogen. A lot of work is being done to make it cheaper, so it can be used more widely in the future.

Water

Water is an essential resource, and its availability is diminishing due to factors such as population growth and socioeconomic development. As consumption rises, water scarcity becomes more prevalent.

Experts predict a 55% increase in water demand by 2050, which suggests that companies in this sector are poised for growth.

You can invest in water by considering companies dedicated to water treatment or supply, purchasing direct shares, or investing in funds or ETFs focused on the water industry. It’s also possible to trade water futures.

Have a look at this guide on investing in water for more details.

Wind energy

Renewable energies are closely associated with sustainable investment, and wind energy is one of the notable contenders in this sector.

Wind farms use the power of wind to generate electricity for homes. However, as experienced investors know, economic cycles, including bearish phases, present opportunities. Consequently, shares of wind energy companies may currently be more affordable than they were a year or two ago.

In this sector, companies involved in manufacturing wind turbines and prominent energy distributors are worth considering.

Investing in sustainable energy, like wind power, aligns with environmentally responsible investment strategies.

How to make sustainable investments? Examples

Over the past decade, the options for sustainable investments have continued to grow, indicating their robust health and a shift in investor mindset. The focus is no longer solely on economic gain but also on social and environmental benefits.

As a result, there are numerous avenues to explore when considering sustainable investments, ranging from individual stocks to investment funds and ETFs.

Investing in sustainable stocks

Stocks represent one of the most practical ways to support sustainability initiatives encompassing social, environmental, and economic projects.

Here are some examples of companies that adhere to ESG criteria, making them suitable options for sustainable investments.

COMPANY	TICKER	WHERE IT IS LISTED
SolarEdge Technologies	SEDG	Nasdaq
Daqo New Energy Corp.	DQ	NYSE
SSE	SSE	LSE
Greencoat UK Wind	UKW	LSE
Plug Power Inc.	PLUG	Nasdaq

If you want to invest in sustainable stocks, make sure you sign up with a regulated, safe broker, such as:

Invest in sustainable ETFs

Another way of investing in eco-conscious investments is through ETFs, or exchange-traded funds, whose underlying assets are sustainable investments. Here are some examples of sustainable ETFs:

ETF Name	Ticker
Vanguard ESG Global All Cap UCITS ETF	V3AA
JPMorgan Carbon Transition Global Equity UCITS ETF	JPCT
Lyxor MSCI Smart Cities ESG Filtered (DR) UCITS ETF	IQCY
Invesco Solar Energy UCITS ETF	S0LR
Amundi Index MSCI World SRI – UCITS ETF	XAMB
CSIF (IE) DAX 50 ESG Blue UCITS ETF B EUR	CSYX
iShares EUR Corporate Bond 0-3yr ESG UCITS ETF EUR (Dist)	QDVL

To invest in ETFs, have a look at the best ETF brokers.

ESG ratings: what do they mean?

Now, the question arises: How can we identify potential sustainable investment candidates that meet ESG criteria? This is where ESG ratings come into play.

ESG ratings serve as evaluation tools that provide insights into a company’s sustainability performance, aiding responsible investment decision-making.

The ESG ratings assess a company’s sustainability performance, its handling of non-financial risks, risk management capabilities, and its impact on social, environmental, and corporate governance issues.

Two of the world’s most significant ESG ratings are the Dow Jones Sustainability Index World (DJSI) and Dow Jones Sustainability Index Europe. These indices offer weighted scores based on various criteria, including financial inclusion, climate strategy, professional development, data privacy, cybersecurity, good governance practices, and human rights.

Examples of ESG rating indices

Here, we present some of the most popular ESG rating indices:

ESG Rating Agency	Characteristics
The Dow Jones Sustainability World Index	The index is made by reviewing and scoring a large number of companies from around the world based on their performance in these ESG areas. The companies that get the highest scores are included in the DJSI World. This list is updated once a year to make sure it stays current.
MSCI ESG Ratings	MSCI ESG Ratings is a system that evaluates how well companies are doing in areas related to the environment, social issues, and governance. The ratings range from ‘AAA’ to ‘CCC’, with ‘AAA’ being the best score a company can receive.
FTSE4Good	The FTSE4Good indices are created and managed by FTSE Russell, a company that specializes in making different kinds of stock market indices. To be included in the FTSE4Good indices, companies have to pass a set of criteria or rules that are related to their ESG practices. These criteria cover various aspects like reducing environmental impact, supporting human rights, and having good labor standards.
CDP List A Europe	CDP focuses on how companies are dealing with issues related to climate change, water security, and deforestation. The CDP A List is a ranking that highlights companies that have done an excellent job in being open about their environmental data and taking actions to reduce their negative impact on the environment.
Stoxx Global ESG Leaders	The index is created by Stoxx, a company that makes various stock market indices. To be included in the Stoxx Global ESG Leaders index, companies are evaluated based on several ESG criteria. These can include things like how a company manages its environmental impact, how it treats its employees, and how transparent and ethical it is in its business dealings.

Check other trading and investment guides

Summary

In summary, sustainable investment is poised to become one of the most popular investment choices in the coming years. The growing interest in companies that adopt ESG criteria suggests that those embracing sustainability will be rewarded by the international investor community.

FAQs

What is the difference between sustainable and traditional investments?

Sustainable investments differ from traditional ones in that they prioritise not only financial returns but also social and environmental benefits.
Traditional investments may focus solely on profit, whereas sustainable investments aim to make a positive impact on society and the planet while still generating competitive financial returns.

How can I start investing sustainably on a limited budget?

You don’t need a large budget to invest sustainably. Consider starting with micro-investing apps or platforms that allow you to invest small amounts regularly. Additionally, you can explore fractional shares, which enable you to invest in high-cost stocks with limited funds.

Are sustainable investments riskier than traditional investments?

Sustainable investments can carry their own set of risks, just like traditional investments. However, the risk profile varies depending on the specific assets and strategies you choose. While some sustainable investments may be considered low-risk, others, such as startups in emerging green sectors, can be more volatile.