What are sustainable investments?
Investors are increasingly focusing on sustainable investments. There are now a number of specialised providers who have each imposed different ethical rules on themselves and make appropriate forms of investment possible.
Since the term “sustainable investments” is not clearly defined, a closer look reveals clear differences. Even the banks are involved in the market and have individual products in their portfolios that can be regarded as sustainable investments.
It should be noted, however, that the general business practice and the fact that many banks are also involved, for example, in arms deals, are also important.
Who offers sustainable investments?
Where do you get a sustainable investment and what is behind the term?
In some places, terms such as “organic” or “eco” are used immediately to cover an entire field. It is a fact that companies from the field of ecological agriculture or alternative energy can also be considered as sustainable investments. However, the possibilities are much more diverse and cannot be outlined with just a few catchwords.
The first question that arises is the reliability of sustainable investments. As in the example of large banks mentioned at the beginning, in many places it is just one of many products that are simply about earning money. The aspect of sustainability is “taken along” as an instrument of marketing, but in view of many other offers that do not deserve this predicate, there is no 100 percent credibility.
In other words, some suppliers do not stand behind their products, which may be an obstacle to investment.
Note that sustainable investments are no less sustainable if they are offered by a traditional bank. However, a number of providers of financial investments and products have existed for a long time that act exclusively sustainably and according to ethical and/or ecological criteria.
Anyone who wants to create a “better world” may be at an even better address here. Of course, sustainable investments can also consist of direct investments in concrete projects and no intermediary or bank at all. We are then talking about crowdfunding and crowdinvesting, which offers a large number of different projects from all conceivable sectors and areas.
Understanding sustainable investments
If you want to understand sustainable investments, you should first be familiar with the basic concepts of the financial industry.
The focus is above all on direct investments in companies and the granting of a subordinated loan in crowd investing or also the investment in special shares or share funds. All of these products must have in common that they are committed to ethical standards that are formulated in different ways.
It goes without saying that profits from child labour must not be allowed to flow and can be regarded as a minimum requirement. Likewise, arms deals are often excluded and nuclear power or the extraction of certain raw materials such as gold or diamonds are also excluded. The terms may differ and the underlying concepts may also vary.
If a product is offered as “green”, in the worst case it can only be a colour indication with virtually no hidden content. The same applies to “ecological” or “biological” and even “sustainable” is not clearly defined.
For this reason one should check all sustainable investments in advance and compare them with one’s own goals. Names are here proverbially “sound and smoke”, because the only thing that counts is where the money goes and not how cleverly the corresponding financial product is marketed.
Classic sustainable investments
The lack of a clear definition should not obscure the fact that certain standards have emerged.
Sustainable investments are often investments in companies that rely on renewable energies. Examples are green electricity from wind power or solar energy or hydroelectric power. There are also sustainable financial investments when it comes to cooperation with countries from the so-called “Third World” or developing countries.
For example, anyone who supports a coffee plantation that is organised according to the principles of Fair Trade or that endeavours to produce clothing from certified organic cotton can do so through sustainable investments. A wealth of other projects could also be mentioned, which make it immediately clear that this is a sustainable investment.
Factors that can be considered are environmental friendliness, fairness and compliance with the ESG criteria. The abbreviation ESG stands for environment, social and governance and defines the criteria quite well. Of course, there are always borderline cases on closer inspection.
What about the wind farm, whose employees are having problems setting up a works council? Or with the agricultural enterprise, which works conventionally, but shows a lot of social commitment?
Examples can be both constructed and gained from practice, and sustainable investments are basically not possible without prior concrete information. Attention should be paid to the sales prospectuses of the funds in question and their composition or to a precise overview of planned projects and the corporate philosophy when it comes to direct investments in the form of crowd investing or crowdfunding.
Transparency is indispensable and it should also be possible to ask questions.
What are the benefits of sustainable investments?
As soon as the question of sustainability has been clarified on an individual basis, the return expectations are formulated.
In this respect, sustainable investments are virtually no different from traditional financial products, because both here and there an investor would also like to receive a return. If you take a look at the performance of sustainable forms of investment, they often perform even better than their conventional counterparts.
It cannot be generally assumed that “sustainable” will be accompanied by a decline in profits and, in view of a general trend towards sustainability, companies active in this field will also receive a considerable boost.
The analogy between a sustainable financial investment and the classic financial market naturally also applies to the question of security and risks. Those who are prepared to take high risks can achieve double-digit percentage profits. However, depending on the type of investment, there is also the threat of a total loss.
For this reason, one should inform oneself precisely in advance of potentially risky investments and absolutely understand the business model of the target company.
Security versus return
Sustainable investments in the form of a savings book or time deposit are not available on the market.
At best, you can invest your money in an ecologically sound bank, but here too there is the problem of low interest rates on fixed-term deposits and the associated real loss of capital.
Equity funds or ETFs promise good risk diversification and consist of a transparently weighted composition of different shares of companies that are classified as sustainable.
However, the criteria appear to be quite lax, especially when one considers that the MSCI World Socially Responsible Index (SRI), which is probably the best known index for “sustainable companies”, contains shares of large corporations such as Mc Donald’s, the Total mineral oil company or the biotechnology company Amgen, Microsoft and many other companies.
The DJSI World Enlarged alias Dow Jones Sustainability World Enlarged Index also includes companies such as Nestle, Samsung and Novartis. This may provide more security for an investment in view of the many “heavyweights”, but those who focus more on sustainability and the change of the world might be better off elsewhere.
It is also possible, for example, to make a direct investment in a convincing project or company.
Anyone who uses crowdfunding and crowdinvesting gets in touch with the companies via an intermediary platform and supports them with a subordinated loan at often attractive fixed interest rates. The capital remains tied up for a precisely defined period and dividends are paid out regularly.
A great advantage is that direct information from the companies or projects is always given and thus there is much more proximity to the “financial product”.