What Are Sustainable Investments?

Sustainable investments rely on the concept of sustainability: creating a better future for the climate and people by investing in companies that are committed to making a positive impact. Done well, sustainable investing is good for investors, companies and society. A sustainable company isn’t only creating fewer greenhouse gasses or a better social impact; it is adopting the practices and systems to sustain business growth long-term.

Sustainable investing offers investors the opportunity to align their financial goals with values that contribute to positive environmental and social outcomes. They can promote sustainable development, drive innovation and encourage responsible business practices. Read on to learn about sustainable investments to fit your goals. 

How Do Sustainable Investments Work?

Each investor can choose the sustainable strategy that meets their goals and values. Investors typically choose either exclusionary or inclusive principles. Using exclusionary principles involves avoiding investing in companies or funds that include or produce products against your values. Exclusionary items might include firearms, tobacco, alcohol, fossil fuels or anything else aligned with an individual investor. Using inclusionary principles, you’ll choose stocks, mutual funds or exchange-traded funds (ETFs) aligning with your values or goals. 

What Are Some Common Types of Sustainable Investments?

Sustainable investing encompasses various asset classes, including green bonds, renewable energy projects, individual stocks, socially responsible mutual funds, impact investing funds, sustainable real estate investment trusts (REITs), environmental, social and governance (ESG) mutual funds and ESG ETFs.

Who Can Access Sustainable Investments?

Anyone can access sustainable investing. Whether you have $10 to invest or $1 million to invest, you can choose to allocate those funds to sustainable funds, green bonds or sustainable stocks. 

How Do I Get Started With Sustainable Investments?

To get started with sustainable investing, research companies, funds, green bonds and other sustainable investment opportunities. Companies that use ESG disclosure frameworks from the Global Reporting Initiative (GRI) Standards and the Sustainability Accounting Standards Board (SASB) Standards usually offer more objective reporting.  

Frameworks like MSCI or Morningstar's Sustainalytics also offer third-party analysis of publicly traded companies’ ESG performance across specific metrics. 

There are also many online resources on ESG investing, as well as lists of the best ESG mutual funds and ETFs, best socially responsible mutual funds and best renewable energy stocks.  

Example of Sustainable Investments

Many companies not traditionally thought of as sustainable, like Apple and Microsoft, are considered sustainable investments. In addition, you can look at investments that support sustainable development and infrastructure, such as:

Renewable energy: Investing in companies that develop and operate renewable energy projects such as solar, wind, hydro or geothermal power generation.

Energy efficiency: Investing in companies that provide energy-efficient solutions, such as efficient lighting, smart grid technologies or energy management systems.

Sustainable agriculture: Investing in companies involved in organic farming, sustainable food production or agricultural technologies that reduce environmental impact.

Water and waste management: Investing in companies that focus on water treatment, water conservation, wastewater management or waste reduction and recycling.

Things to Consider With Sustainable Investments

When considering sustainable investing, several factors worth considering are:

Factor #1: Risk and Return

Understand the risk profile and potential returns associated with different sustainable investment options. Risk mitigation and overall financial analysis of a company remain important, regardless of potential sustainable impacts. 

Factor #2: Impact Measurement

Evaluate how investments align with your desired environmental or social impact and whether the impact can be measured effectively. Many times, investors are left without specific measurements of individual impact. How will you measure what you’ve achieved? 

Common measurements include the percentage of your portfolio in sustainable investments, the total carbon impact of companies or holdings or the impact towards social change created with investments. Usually, this will take research to understand. 

Factor #3: Diversification

Consider diversifying your sustainable investment portfolio across various sectors and asset classes to manage risk. You don’t have to put 100% of your portfolio into sustainable investments. You can even consider a gradual transition while continuing to build a diverse, risk-appropriate portfolio. 

Factor #4: ESG Analysis

Evaluate the ESG performance of the companies or funds you are considering. Look for transparent ESG reporting, robust sustainability practices and alignment with your values and priorities.

Factor #5: Performance And Financial Stability

Assess the financial performance and stability of the investments you are considering. Sustainable investments should not compromise your financial goals. Review historical returns, financial statements and potential risks associated with the investment.

Factor #6: Market Volatility

Like any investment, sustainable investments are subject to market volatility and fluctuations. Be prepared for potential short-term changes in value and have a long-term investment horizon in mind to ride out market cycles and benefit from long-term growth. 

Factor #7: Regulatory And Policy Environment

Changes in regulations or government support can impact the performance and viability of certain types of sustainable investments. Stay informed about relevant regulations, policies and incentives related to sustainable investing and adjust your investment strategy accordingly.  

Factor #8: Long-Term Outlook

Assess the long-term viability and growth potential of sustainable investment sectors, considering factors such as regulatory changes and market trends. Look for growth areas and new opportunities that could lead to greater long-term returns. 

Advantages of Sustainable Investments

There are numerous advantages of sustainable investing, including:

• Creating a positive environmental and social impact
• Less long-term volatility, even in market downturns
• Comparable returns to traditional investments
• Fewer environmental risks
• Opportunities for sustainable company growth and greater returns

Disadvantages of Sustainable Investments

While there are many pros to sustainable investing, it’s important to be aware of the potential disadvantages of sustainable investing. These include:

• Fewer investment options to choose from
• Lack of transparency or accurate reports on ESG standards
• No standardized reporting framework
• Possibility of greenwashed claims
• Possible ethical tradeoffs (most things aren’t perfect)
• Limited sustainable reporting track record for some companies

Comparison: Sustainable Investments vs. Traditional Investments

Investing of all types is the process of purchasing something with the hope that it will return greater value. The basis of investment strategies comes down to financial analysis and investing for the long term. However, there are a number of differences between sustainable investments and traditional investments. Below, you’ll find the key comparisons.

Performance

Sustainable investments outperformed traditional funds over major reporting periods over the last 10 years. However, 2022 was a rough year for all investment classes, with global sustainable funds slightly underperforming traditional funds (a decrease of 19% compared to traditional funds' 16% decline).  

Risk Management

Sustainable investments incorporate robust ESG factors that can also function as risk management strategies. These ESG strategies can protect companies from market share losses from policies on carbon emissions regulations, water usage regulations or other environmental or supply chain vulnerabilities. 

For this reason, sustainable investments potentially offer a more comprehensive approach to assessing and mitigating risks compared to traditional investments.

Long-Term Impact

There's no way to put a dollar value on the long-term impact potential of sustainable investments in addressing pressing global challenges, such as climate change, resource depletion and social inequality. Compared to traditional investments that may focus primarily on financial returns, sustainable investments offer an invaluable opportunity to do good and leave a better world while earning competitive returns. 

Market Trends

Current market trends and indicators suggest the increasing relevance and popularity of sustainable investments. The Morgan Stanley 2022 Sustainability Report shows positive investment inflows of $115 billion in contrast to steady outflows in traditional funds. Sustainable assets under management grew steadily at 7%.  By the end of 2022, sustainable funds’ assets under management (AUM) totaled nearly $2.8 trillion globally. 

Regulatory Landscape

The evolving regulatory landscape around sustainable investing can impact investors in the long term and short term. These include government policies and initiatives that support or mandate sustainable practices, as well as global reporting standards that can facilitate objective comparisons of companies' ESG performance. 

In contrast, traditional investments may face regulatory challenges or risks associated with carbon emissions, social injustice or environmental changes affecting the supply chain, water or waste management.

Implementing Your Sustainable Investment Strategy

From positive social and environmental impacts to sustainable, competitive returns, there's a reason investors are flocking to sustainable investing. Whether you choose to place a portion of your portfolio in a sustainable fund or build a comprehensive ESG investment strategy, it's clear that sustainable investing is here to stay. 

How can you ride the trend and build maximum returns? Research options and consider ESG reporting and third-party verification along with traditional performance indicators to build a diverse portfolio to hold for the long term. Investors have the opportunity to grow wealth while creating the future they want for the world. 

Frequently Asked Questions