Many investors today are no longer satisfied with a good financial return. They want more, namely to make a real difference with their finances: For society, nature and the future for generations to come.
Impact investing means selecting investments according to ethical and sustainable factors in order to tackle the pressing problems of our time. Not only consumers, but also investors are becoming increasingly aware of the impact of their capital. By investing in companies that protect the environment, stand up to human rights and social change, you can promote this behavior and help decide which values should be realized in the global economy. But how can you, as a potential investor, be sure that you are not falling victim to a greenwashing campaign and which investments are also financially worthwhile for you?
Principles of sustainable investing – What exactly does sustainable investing mean?
The topic of sustainability in the world of finance has a deeper meaning than environmentalism or resource conservation. Even though carbon neutrality and environmental protection are important components of corporate sustainability, there are two other fundamental building blocks: Transparency and social responsibility.
In particular, fair and transparent supply chains and employee rights are coming to the forefront, which has become especially urgent in the wake of the economic losses caused by Covid-19.
Only those who do not lose sight of any of the three elements – environment, social issues and transparency – can speak of a truly sustainable investment. For better orientation and differentiation from pseudo-sustainable investments on the financial markets, the so-called ESG criteria have become the industry standard.
ESG stands for “Environmental Social Governance”. ESG criteria are voluntary measures that go beyond the legal requirements in terms of sustainability:
- The “Environmental” component challenges the company’s carbon footprint and to what extent resources are protected in the production of goods. Minimization of greenhouse gases, the use of renewable energies, environmentally friendly wastewater disposal and responsible supply chains are key factors here.
- The second building block, “Social,” demands safe and fair working conditions and payment. The factors of gender equality, inclusion, educational opportunities, health care and a zero tolerance rule for child labor come into play here.
- The third building block, “Governance,” looks at the corporate aspects of sustainability: Transparent supervisory structures, anti-corruption measures, salary transparency and the social impact of products are important here.
Unfortunately, a general quality seal has not yet been developed from these criteria, but various rating providers, such as the analysis companies FWW, Morningstar and Scope, are attempting to categorize and evaluate sustainable investments. The financial analysts assess investments according to ESG criteria, but from different perspectives. Some of them focus on the fund manager’s sustainability strategy, the others on the individual shares and their compliance with ESG criteria. For this reason, sustainability ratings can vary widely depending on the analysis.
Options for ethical-ecological investments and problems
Before deciding on the right impact investment for you, keep the following factors in mind: The investment period, the investment risks and the return of your investment. In this article, we do not want to focus on conventional green investments such as savings accounts or real estate funds, but rather shine a light on sustainable investment funds and stocks. In the following, we will introduce you to three options for impact investing, taking into account the factors mentioned above:
- By subscribing to bonds or shares of your favorite social enterprises, you can directly stand up for your values and use your money specifically for your most pressing concerns. Basically, you can invest for the long term and achieve high returns, but individual investments are not the safest way. Therefore, nobody should put a large part of their own capital on just one card, i.e. a single investment.
- Recently, a real trend has emerged in the financial world: ETF funds. ETF stands for “exchange-traded fund”. These are index funds listed on the stock market, with which you can diversify your assets. Here, it is not fund managers but algorithms that select the individual shares and bundle them into packages. This is why ETFs are considered to be a very safe and inexpensive investment option with good returns if you hold them long term. ETFs can be sold on the stock market or returned to the fund at any time. Meanwhile, ETFs with so-called “social responsibility” profiles are also offered, but many investors have higher expectations in terms of sustainability: You must be aware that all sustainable ETF funds also include food and cosmetics companies that have been harshly criticized. Here, “social responsibility” rather means that your money is not invested in oil and weapons, after all.
- Another popular investment option is actively managed funds. Here, investors with high standards of social responsibility and environmental awareness will also find what they are looking for. The ESG ratings mentioned above can be helpful in choosing the right fund, but we highly recommend that you read about the intended investment projects yourself. Fund managers analyze the financial markets and select the best stocks in order to achieve particularly high returns for investors. Therefore, you will face higher prices, but also higher chances of profit. Investment funds have no minimum duration and can be bought and sold spontaneously.
Investing ecologically has economic advantages
The mainstream thinking has always been, “If I want to do something good, I’ll buy fair and organic, donate to a social organization, or find volunteer work.” But investment strategies also have a huge impact on society. Those who choose impact investing have a unique opportunity to support sustainable projects through financial investments, as well as to make profits through social change and green growth. Respectable returns can also be achieved with sustainable investments. The facts speak for themselves: the value of global investments that follow ESG guidelines has nearly doubled within the last four years and more than tripled in the last eight years – to $40.5 trillion in 2020. Thus, impact investing dispels once and for all the prejudice that social and environmental concerns cannot be reconciled with individual profits.
Conclusion
Thanks to the many possibilities offered by impact investing, supporting social change is becoming easier and easier, even for small investors. However, making the right choice is not easy for everyone. Therefore, it is very important to ask the following questions before plunging into the jungle of impact investing:
What values do I want to stand for? How important is the security of my investment to me? What duration makes sense for me? And what returns do I expect?
Once you have clarified these factors for yourself as a potential investor, it is easy to filter out the best investment offers with the help of ESG ratings and your personal in-depth study of the companies or funds to be supported.
No matter which option you choose: Impact investing is a future-oriented investment strategy: Only sustainable business and fair value creation can survive in the long run on our planet with its limited resources.
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