Why sustainable investing matters
Should the environment factor into your investment decisions? Investment expert and Stockspot CEO Chris Brycki shares his top tips for choosing sustainable investments.
Values are something we're all thinking about as we move forward from a very tumultuous year - it's hard not to ask ourselves what kind of future we want. Investing is a very personal choice, but is also a position of privilege.
Wherever you choose to put your money, it's clear that as the sustainable investing framework becomes more sophisticated, returns on investment will be more than monetary – and hopefully, that leads to a better world.
What's not always clear is how "sustainable investing" is defined. Depending on who you talk to, it can also be called socially responsible investing, impact investing, or ethical investing.
Without standardisation, or even one widely accepted phrase or definition, "greenwashing" happens. This is where companies make misleading "sustainable" or "ethical" marketing claims.
How to tell if an investment option is sustainable
Simply put, sustainable investing should support the growth and activities of companies that are steering us towards a better future. The definition of "better" may not be the same for every individual, but I imagine "better" to mean equal opportunity, minimal corruption, and a climate change reversal.
Historically, companies have been considered sustainable or ethical based on environmental, social and governance (ESG) factors. In investing, that means companies are screened out for fossil fuel activities, alcohol, tobacco or weapons production. But, for a sustainable screening process to be effective, it must also include companies who are proactively leading initiatives such as renewable energy, recycling, social responsibility and energy-efficient transport.
Some investment funds screen in and out better than others, but as consumers and investors become more educated, demand will lead to better products and more robust regulation.
For example, Stockspot (which I founded), created a sustainable investing product based on client feedback. It's proof that if people want it, it can happen.
More broadly, as interest in this type of investing grows, so will the number of regulatory initiatives (such as the United Nations and European Commission) aimed at fixing the lack of standardisation.
How sustainable investing can help change the world
It's heartening that many organisations are already moving in a more sustainable direction, but the growth of positive initiatives can be scaled with money and resources. This is the crux of why sustainable investing matters.
If more and more people sustainably invest, they're taking their money away from companies in industries that aren't deemed "sustainable". Theoretically, if less money is provided to these "unsustainable" industries then they should become less valuable as their share prices fall. In theory, this could lead to corporate policy change, reduced investment interest, and a change in the way the company operates.
It's a win-win situation for the consumer, the investor, the business, society and the planet. The more is invested in sustainable businesses and initiatives, the more companies get rewarded for sustainable practices, the more they continue to propagate these practices - and the happy cycle continues.
Additionally, as more people invest sustainably, trust around this type of investment strategy builds, and this will likely have a knock-on effect.
Is sustainable investing risky?
A common critique of sustainable investing is that many investors believe they'll need to sacrifice returns.
This is an unfounded belief since research – including from the International Monetary Fund – has found that performance is very comparable between sustainable and conventional strategies.
However, not all sustainable investments have the same return, so it's important to research or choose a trustworthy investment advisor. Many sustainable investments often have higher management fees, which could eat into your returns.
The good news is that companies with higher ESG (Environmental, Social and Governance) scores can demonstrate lower investment risk. In fact, during the 2020 COVID-19 crisis, sustainable investments displayed more resilience than non-sustainable investments.
This could be because companies with lower ESG scores can open themselves up to legal action, reputational damage, and lack of transparency. When you invest sustainably, you're likelier to avoid companies with low ESG scores, and you can mitigate the overall risk of your portfolio, especially over the long-term.
Still, regardless of current performance, it's important to remember that sustainable investments are like any investments. This means that positive or negative performance will generally be due to the cyclical nature of the market. For example, healthcare and technology are currently resonating with a large part of the market, while oil stocks and traditional energy aren't.
For sustainable investing to be a sustainable model, investors shouldn't balk when their returns are lower. This is all part of long-term investing, and my advice for a long-term sustainable portfolio is to diversify it and include defensive assets that will smooth out your investment journey and allow you to continue investing in a way that aligns with your values.
Chris Brycki is a passionate consumer champion and the Founder and CEO of Stockspot, Australia's first and largest online investment advisor. With over 21 years of investment experience, he sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
Picture: Getty Images, supplied
