Our guide to building a sustainable investment portfolio
- Written by Matthew Linnecar
- Published on
The term 'sustainable investments' has become a buzz term in recent years as more investors look to invest in alignment with their core values.
There is no one-size-fits-all definition of what is a 'sustainable investment'. Investors may have different criteria for what they consider to be sustainable. However, generally, a 'sustainable investment' is defined as an investment made into a company that either has an explicit mandate as part of its modus operandi to positively impact the environment and society or is working to reduce its environmental impact and improve its social practices.
Sustainable investing may also be known under different guises, such as ESG (environmental, social, and governance) or impact investing. How investors define these terms may differ, and unfortunately, as a result, there is an increasing danger of greenwashing occurring.
So what's the difference between sustainable investing, ESG and impact investing? Check out our breakdown of the key differences below.
Sustainable investing is a broad term that encompasses any investment strategy that seeks to generate financial returns while positively impacting the environment or society.
Sustainable investors may use a variety of methods to achieve their goals, such as:
ESG investing is a more specific type of sustainable investing focusing on environmental, social, and governance factors. ESG investors believe these factors can have a material impact on a company's long-term financial performance, and they may use various methods to assess a company's ESG performance.
These can include:
ESG investing is often considered a more risk-averse approach to sustainable investing. This is because ESG investors are more likely to avoid companies involved in risky or controversial activities.
Impact investing is a more specific type of investment that seeks to generate a measurable social or environmental impact and a financial return. Impact investors typically invest in companies or projects that are working to address specific social or environmental challenges. In fact, some impact investors may forego potential higher financial returns to maximise the environmental and social returns that their investment may make.
Each investor will have their personal views on what constitutes impact investing. These can range from "you can still maximise returns and create impact" to "you have to sacrifice financial returns to legitimately generate the maximum impact that the business can".
If you want the companies you invest in to have an impact as part of their DNA, there are various certifications, like B Corp certification, that you can look for. These certifications indicate that the company is committed to being a force for good.
In general, ESG investing is a more passive approach to investing, while impact investing is more active. ESG investors are primarily focused on reducing risk and maximising returns, while impact investors are also focused on generating a measurable social or environmental impact.
Most sectors will have examples of sustainable or impact-focused companies you can invest in, whether listed companies, private companies, funds, or exchange-traded funds (ETFs).
An example is the transport sector, where you have pure-play electric vehicle companies alongside traditional vehicle manufacturers that are improving their environmental performance. In the energy sector, you have pure-play renewable energy companies alongside traditional players that are increasing their use of renewables while still having a mix of 'brown' energy.
Once you've decided what constitutes sustainable investing for you, you can invest in various ways. It's essential to research and choose the option that best meets your needs and objectives.
These can include:
I recommend talking to your financial advisor if you need help figuring out where to start. They can help you to understand the different sustainable investment options available and choose the option that is right for you. You may want to start small if you are new to sustainable investing. You can gradually increase your investment as you become more comfortable with the concept.
A simple and highly impactful place to start is by understanding where your money that's already invested through your Kiwisaver, investments, or bank goes and moving it to institutions that align with your sustainable investing approach. Mindful Money is a great resource that helps New Zealanders easily discover how their savings and KiwiSaver are invested and suggests ethical, sustainable alternatives.
Sustainable investing has become increasingly popular in recent years as investors become more concerned about their investments' environmental and social impact. This has led to a proliferation of ESG funds and products, making it more difficult for investors to distinguish between genuine ESG investments and those that are simply greenwashing.
There is no one-size-fits-all definition of sustainable investing, so it can be difficult for investors to compare different funds and products. This makes it easier for companies to greenwash, as they can simply claim to meet ESG criteria without actually doing so. With no current regulation governing ESG investing and no clear definition of what constitutes greenwashing, it can make it difficult to hold companies accountable for greenwashing.
However, there is increasing scrutiny on ESG investments. Investors are becoming more aware of the risks of greenwashing and therefore demanding more transparency from companies that claim to be sustainable. This will likely lead to more regulation of ESG investing in the future, making it more difficult for companies to greenwash.
