Sustainable investing
Want to invest sustainably? Learn about different approaches, from 'best in class' to impact investing.
In the previous lessons you explored a range of investment types. Separate from the question of whether to invest in stocks, bonds or ETFs, you might also want to factor sustainability into your investment strategy. In this lesson you'll learn what to look out for when looking for sustainable investments.
‘Best in class’ | You invest in the most sustainable companies within a given category, such as a sector or region. This approach essentially rewards good behaviour. Want to invest in US stocks and support sustainability at the same time? You could choose to invest only in the most sustainable companies in the US. |
Exclusion | Are there certain companies or sectors you simply don't want to put money into — weapons manufacturers or the tobacco industry, for example? You can exclude them. This means deliberately leaving those companies or sectors out of your investment portfolio. |
Impact investing | This goes a step further: you actively choose to invest in companies or organisations that want to make a positive difference to the environment or society. These companies have concrete goals in those areas. Returns may be relatively modest — though not necessarily — but as an impact investor, the positive contribution to people or planet comes first. |
You can also combine these approaches — for example by focusing on best-in-class companies while also excluding certain sectors entirely.
How do you know which investments are actually sustainable?
When assessing whether an investment is genuinely sustainable, the same principle applies as when you're doing your weekly shop: don't be fooled by the packaging. Happy chickens on an egg box don't automatically mean the eggs inside were laid by happy chickens. To know for sure, you need to look deeper — at recognised quality marks, or even at the small print.
The same applies to investment products: the best way to assess sustainability is to look at recognised certifications and at what an investment product actually contains.
Greenwashing
Greenwashing is when a product (i.e. an investment) is marketed as more sustainable than it actually is.
Greenwashing misleads investors: they believe they're investing in line with their values, when in reality their money is going to companies or sectors that don't reflect those values at all. The European Union, among others, is working to combat greenwashing through legislation.
ESG: environment, people and governance
The term "sustainability" in investing always comes back to three letters: ESG.
🌳 | 🫱🏽🫲🏻 | 👩🏼⚖️ |
|---|---|---|
E: Environmental | S: Social | G: Governance |
How positive or harmful is an investment for the natural environment? | What impact does an investment have on people and society? | How responsibly is a company or organisation managed? |
An investment can be assessed across all three of these dimensions, giving a picture of how sustainable it really is.
A useful framework for sustainable investors
The EU's Sustainable Finance Disclosure Regulation — or SFDR — sets requirements for how investors must be informed about sustainability. Put simply, the SFDR says you can only use the word "sustainability" in your marketing if you have real evidence to back it up.
If sustainability matters to you, two articles of the SFDR in particular are worth knowing:
Article 8: Light green.
Article 8 means the product actively promotes ESG characteristics. Because promoting ESG requires substantive evidence, you can reasonably assume the product genuinely works toward environmental, social and governance goals. These are called "light green" investments.
Article 9: Dark green.
Article 9 covers impact investing — products where sustainability is a core objective. Think investment funds focused on biodiversity or the circular economy. These are the most sustainable category and are known as "dark green" investments.
Key takeaways
- Sustainable investing can take different forms: selecting best-in-class investments, excluding certain sectors or companies, or choosing impact investments
- Sustainability in investing always refers to ESG: Environmental, Social and Governance
- Articles 8 and 9 of the EU's SFDR provide a clear framework for assessing how sustainable an investment product really is