More and more investors are now realising sustainability as an important aspect that can secure future returns. Roughly one in four dollars in the U.S., for example, is now invested through an ESG (Environmental, Social and Governance) lens.
Yet, sustainable investing must be done with caution.
Analysts increasingly warn that too many investors are currently pumping cash into anything that “looks green” — sending valuations of eco-friendly companies into all-time highs and fanning fears of a bubble. As the demand for sustainable investments is rising, so is the number of funds and companies that use the ESG label mainly (or purely) as a marketing gimmick.
That brings up an important question: in the quest to build up a truly sustainable investment portfolio, where and how do you begin to avoid being greenwashed? Here are 4 simple tips!
#1: Don’t get too stuck up in the latest ESG trends
To this day there is still very little common-ground on what ESG actually means, with no standardized criteria. The result is that many of the funds that use the ESG label nowadays are not as sustainable as they may appear. Some of the most popular ESG funds, for example, invest in the world’s largest carbon emitters. So even funds that score well on ESG criteria may still be supporting companies that are not in line with your values.
#2: Do your research and explore other ways to invest sustainably
If you want to put your money into companies that have future-proof climate strategies — do your research. Start by finding out about the different types of responsible investing. Learning about what they actually mean will give you better insights on how to differentiate between “green filters” and “real impact”.
For instance, one such investment type is impact investing — an investment strategy that aims to generate positive impact for a specific social or environmental cause. It examines the impact that a company has on the world, investing only in those that have a positive impact in whatever social or environmental areas the investor is focused on. If you really care about climate change for example, opportunities like climate impact investing can help you direct your investments into the cause you truly support.
Top tip: Crowdinvesting
Although funds are certainly an easy way to invest in sustainability-focused companies, they aren’t necessarily the only or the best way to invest. One interesting type to explore is crowdinvesting.
Crowdinvesting is a special form of crowdfunding, where individuals invest via an online platform to achieve a specific target and earn interest. The main idea is to raise the required capital for a specific project or company by obtaining small contributions from a large number of investors. In exchange, the investors receive financial benefits in the form of interest payments or stakes in the company. The advantage is transparency. Often these are direct investments in individual projects, so that investors can better track how their money is used.
ecoligo.investments, for instance, enables investors to benefit financially from renewable energy projects, while at the same time supporting sustainable economic development in emerging countries. In addition to economic benefits, investors can also measure the CO2 emissions their investments save.
#3: Diversification is key
Last but not least: no matter what investment products you choose to build up your sustainable portfolio, always make sure that you diversify. As they say: don’t put all your eggs in one basket!
It’s no secret that, if done wrong, investing can be an emotional roller. Sustainable investing is no exception here: one of the most common mistakes some investors make is to exclusively buy funds that are very concentrated in a particular industry in an attempt to directly align their investments with their values.
This would be the case, for instance, if you invested all your money in wind power companies, because you want to be climate-friendly. Despite your wish that all your shares will soar, there will be periods when some of your holdings will lose money. When that occurs, you need investments in other industries, technologies, regions or financial products to diversify your portfolio and offset the decline.
In today’s world, a well-performing portfolio goes hand in hand with sustainability. However, the recent surge in demand for sustainable investment products has led to a multitude of funds incorporating “sustainability” criteria in their selection process – often as a mere marketing label rather than to elicit actual positive sustainability impact.
If you, however, do your own research and diversify your portfolio accordingly, you can earn good returns on your investments and protect the planet while you do so.
This article was written by Cooler Future, a fintech startup offering transparent and effective impact investment solutions for the climate-conscious generation. Their mission is to create positive climate impact by investing in assets from companies that are actively reducing their carbon footprint. With Cooler Future’s intuitive, easy-to-use mobile app, anyone can track the footprint of their investments, while generating financial returns at the same time.