What Is Sustainable Investing? (Best Assets to Place Your Bets On)

Sustainable investing is investing in “woke” companies that contribute to positive social and environmental change. 

In many ways, this is an evolution of the investment process, as investors increasingly consider ESG (Environmental, Social, and Governance) criteria alongside pure financial gains. 

Sounds good in theory. 

But, how does it work in reality? And what are the sustainable assets you should put your money in?

In this article, we’ll look at what is sustainable investing, including risks involved with sustainable investing, and how sustainable investments have performed. We’ll also explore 3 ways to invest sustainably (including through Vinovest.) 

What Is Sustainable Investing?

While all investing aims at maximizing financial gains, sustainable investing looks at more than just investment returns. It considers a company's or fund’s impact on the environment and society. 

Essentially, a sustainable investing strategy aims to reward the investor financially while contributing to positive change. 

Interestingly, ethical investing has more benefits than just encouraging sustainability. 

For instance, sustainable fund investments often offer lower market risk. According to a whitepaper by Morgan Stanley, they experienced a 20% lower downside deviation than the traditional funds between 2004 and 2018.

Further, businesses with a good rating on ESG factors typically have a lower risk exposure. This could be because these firms have stringent methods of risk monitoring. 

So, what exactly are these ESG factors?

ESG Factors Explained

Here’s a quick breakdown of the sustainability factors. 

You can use these standards to evaluate a company and screen your potential investments.

• Environmental: Examines how a company contributes to climate change through improvements in greenhouse gas emissions, waste management, natural resource conservation, and treatment of animals. 
• Social: Looks at causes related to human rights, labor standards, diversity, and whether the company holds its suppliers to its own ESG standards. 
• Corporate governance: This refers to how companies promote good business ethics, trust, transparency, and compliance in the marketplace. These companies focus on ethics above profit. 

Additionally, companies that align with ESG can help achieve the UN’s Sustainable Development Goals. Established in 2015, the Sustainable Development Goals are a set of objectives around poverty alleviation, climate change, and more that the world collectively needs to reach by 2030. 

Now, investment managers may refer to sustainable investing as ethical investing, impact investing, ESG investing, and more.

So:

What’s The Difference Between Sustainable Investing, ESG Investing, And Impact Investing?

Interestingly, all of them refer to the same thing - an investment strategy that seeks a positive impact in addition to solid investment returns.

How each strategy sets out to achieve this can vary. 

Some may only pick investments that make a positive impact, while others simply avoid negative ones.

For example, a fund in a sustainable investing strategy could exclude tobacco or firearm companies. The fund could still be called “sustainable” without actually holding any such assets.

ESG investing is the exception. ESG is simply a methodology for measuring the sustainability of an investment. 

Meanwhile, impact investing focuses on positive outcomes only, like a social good. For instance, an impact investment strategy could involve funding nonprofit research in electric vehicles.

But, there are a few points you should keep in mind:

3 ESG Issues To Consider Before You Invest

While making a responsible investment is encouraged, there are still some ESG considerations you should make: 

• There’s no one size fits all: The criteria used to define the ESG strategy can vary between funds. Do your research to ensure that the fund’s values align with your own before making an investment decision. 
• Financial performance may be subdued: Excluding certain companies from your portfolio may affect ESG performance. For example, if oil stocks are booming, a portfolio excluding oil won’t benefit from those gains. There may also be higher fees involved when investing in ESG funds, which can further impact your potential returns.
• Picking your issues can be tricky: While lots of stocks are rated according to ESG criteria, there are still some gray areas. For example, ExxonMobil scores high on the Governance factor as a result of its diverse board. This earned them the same ESG score as Tesla. While the electric vehicle manufacturer scores high on the Environmental factor, it suffers on the Governance and Social components. 

And, that’s not all.

3 ESG Risks To Keep In Mind

As is the case with any investment, there are certain ESG risks that you should keep in mind:

• Access to information: One of the critical risks in ESG investing is the lack of information. ESG regulations are still sparse, meaning what sustainable companies in need to disclose is still patchy. This can make it difficult to accurately determine whether a company meets your socially responsible investing requirements.
• Regulatory risks: According to Gartner’s 2021 Emerging Risks Monitor Report, the regulatory risks associated with ESG disclosures became the second most cited concern among the 153 senior executives surveyed. 

Executives have long been concerned about investor pressure on ESG disclosures. Legal frameworks are only now being established. In April 2022, the Securities and Exchange Commission (SEC) voted for a rule where firms are required to disclose their climate risks and their greenhouse gas emissions in annual SEC filings. 

This new legislation will require companies to track, manage, and plan their environmental data in a more structured and systematic way.

• Perception: Investments without a solid ESG program are viewed as unprogressive, which affects perception. This may impact investment value. At the same time, companies that focus on ESG can potentially increase in value. 

Now comes the important part:

How Do Sustainable Investment Funds Perform? 

Sustainable investments comprise many asset classes, including stocks, fixed income, and alternative investments like private equity, real estate, and hedge funds. (Note that hedge funds are typically only available to accredited and institutional investors). 

A study by the Morgan Stanley Institute for Sustainable Investing found that there was no compromise in financial return even after avoiding assets like oil. 

Sustainable funds may also help in mitigating portfolio risk. 

The study also found that sustainable funds offer more stability during periods of high volatility.

Fidelity analyzed the performance of various ESG investments around the world between 1970 and 2014. They found that half beat the market while only 11% underperformed.

Further, BlackRock found that during the Covid-19 pandemic in 2020, over 80% of ESG investment funds outperformed their non-ESG counterparts.

In 2020 alone, investors committed $51 billion to responsible investing and spurred the launch of 71 new ESG funds. 

So, how can you add sustainable investments to your portfolio?

3 Best Sustainable Investment Opportunities

Here are the best ways to make a responsible investment: 

1. ESG funds 

ESG funds are mutual funds that have received an ESG grade. These funds invest in businesses that support sustainable practices.

Beyond the focus on sustainability, ESG funds function like any other investment fund and can be a mutual fund or an exchange-traded fund.

Selecting which ESG mutual funds to invest in can be subjective, as some may align more with your values than others.

Some ESG funds are broadly focused, while others are more specific. For example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF holds companies that don't own fossil fuel reserves. 

2. Sustainable stocks

Investing in individual stocks generally involves more risk than investing in funds, but you do have the benefit of picking and choosing which sustainable companies appeal to you. 

For example, if you’re passionate about the environment, renewable energy stocks might be an option. 

If investing in individual stocks, it's essential to look at more than just the company’s financial performance. Look at what the company does and how that affects the local community or environment.

3. Robo-advisors that Build Socially Responsible Portfolios

For a small fee, robo-advisors can automatically suggest a mutual fund or two to build your socially conscious investment portfolio. 

But remember:

What constitutes an ESG investment will vary between robo-advisors. So be sure to research and pick one that suits you best. 

A fine example is Vinovest - a leading wine investment platform built on sustainability.

Fine Wine: A Sustainable Investment With Outstanding Potential

Investing in fine wine should form part of any solid investment strategy. More so, for investors seeking ESG integration into their portfolio.

Why? 

Some of the best winemakers in the world have introduced innovative, sustainable winemaking practices like reusing byproducts, reducing water wastage and pesticides, and more. 

A smart way to indirectly contribute to this push towards greener winemaking is by investing in wine through Vinovest. 

Vinovest is built on sustainable business practices, including: 

• Carbon offsetting: You’re automatically enrolled in Vinovest’s Carbon Offsetting program, which plants one tree for every 10 cases of wine bought. 
• Digital ownership: To reduce carbon emissions, your newly purchased bottle of wine remains in secure storage rather than being shipped around the world. Vinovest simply changes the digital ownership.
• Transparency: The platform publishes an annual environmental sustainability report so you can see its carbon reduction efforts.

Fine Wine: A Worthy Addition To Your Sustainable Portfolio

Sustainable investing is an excellent way to put your money where your values are without sacrificing financial return. 

Fortunately, there is an increasing number of investments for those wanting to make a positive impact. While equities are a solid option, you should diversify with an equally sustainable alternative asset class like fine wine.

Vinovest is an excellent way of aligning your socially responsible investing goals with a potentially lucrative asset class. Check out the website to discover more!