How to Find Sustainable Companies and ETFs for Your Portfolio

Sustainable investing is becoming increasingly important as more investors seek to put their money into companies and projects that meet environmental, social, and ethical standards.

But what does sustainable investing really mean, and how do you select the right companies and ETFs that meet these criteria? This article will cover everything you need to know about sustainable investing and how to build a sustainable investment strategy for your portfolio.

What Does Sustainable Investing Mean? Understanding ESG Criteria

Sustainable investing is based on the idea of not only maximizing financial returns but also making a positive impact on the environment, society, and corporate governance (ESG: Environmental, Social, Governance). Investors interested in sustainable investing look for companies and funds that follow ethical business practices and contribute to solving global challenges such as climate change, social inequality, and fair corporate governance.

Defining ESG and Sustainable Investment Criteria

Let’s start with the basics. ESG criteria form the foundation of sustainable investing. They represent the ABCs of sustainability and are divided into three categories:

Environmental: This criterion examines a company’s impact on the environment, including factors like carbon emissions, energy use, natural resource management, and waste disposal.

Social: This category considers how a company treats its employees, customers, and society. Issues like labor conditions, diversity, consumer protection, and community welfare are relevant here.

Governance: The final aspect relates to corporate governance. It analyzes how transparent and ethical a company’s management is, covering issues such as anti-corruption efforts, transparency, shareholder rights, and fair executive compensation.

By incorporating ESG criteria into your investment decisions, you contribute to encouraging companies to operate more sustainably and drive positive social and environmental change.

If you’re interested in a deeper understanding of these criteria, feel free to check out our Impact Academy, where we dive into sustainable investing over four intensive weeks.

How to Find Sustainable Stocks

Finding companies that operate sustainably can be challenging, as not all companies are transparent about their sustainability practices. However, there are various ways to identify and evaluate sustainable companies.

To make it easier, we’ve built our own search engine. With our money:care Impact Check, you can easily search for stocks and ETFs that meet your personal sustainability requirements.

Our data is based on companies’ disclosures, organized in the most transparent way possible. You can learn more about our evaluation methods on our Methodology page.

Understanding Sustainability Reports and ESG Ratings

Many companies publish sustainability reports that outline their activities regarding environmental, social, and governance issues. These reports provide a good foundation to understand a company’s sustainability strategy. However, without experience, interpreting these reports can be challenging.

We’ve done this work for you and can tell you it’s no small task! These reports are often hundreds of pages long and can be misleading due to greenwashing. Extracting the relevant figures is no easy feat.

To simplify the interpretation of these numbers, ESG ratings are available. ESG ratings are created by specialized rating agencies and offer an independent assessment of a company’s sustainability. They’re based on numerous criteria and provide investors with helpful guidance. Some well-known ESG rating agencies include MSCI, Sustainalytics, and ISS ESG.

However, these ESG ratings are primarily geared toward institutional investors, such as banks and other financial institutions. As a retail investor, these ratings can often be difficult to understand and may not align with your values.

At money:care, we’re committed to providing you with the best tools and resources for sustainable investing – be it through our Impact Check or Impact Academy.

Using ESG Criteria in Corporate Evaluation

If you want to integrate sustainable aspects into your portfolio, you don’t need to do the heavy lifting or read thousands of pages of reports. Instead, consider which aspects of sustainability are personally important to you.

In our search engine, you can incorporate 12 indicators from the areas of climate, society, and gender in your decision-making process. Check how a company or ETF scores across different areas, and decide for yourself if it meets your standards.

Selecting Sustainable ETFs: Criteria to Keep in Mind

In addition to sustainable stocks, there are also sustainable ETFs, as they consist of a collection of individual stocks. Sustainable ETFs offer a convenient way to invest in a variety of companies that meet ESG criteria. They’re a popular choice for investors who want to pursue a sustainable investment strategy but lack the time or expertise to analyze individual companies.

However, beware that the devil is in the details. While there appears to be a wide selection of sustainable ETFs, only a few truly meet strict criteria. The evaluation methods vary from ETF to ETF and aren’t always immediately obvious.

For example, with Best-In-Class evaluation methods, companies that you might not consider sustainable could end up in the ETF. A Best-In-Class ETF typically includes the most sustainable companies from each industry. Without additional exclusion criteria, this could mean that oil companies or arms manufacturers are included in your sustainable ETF.

With our ETF Search, you can examine any ETF, view its individual holdings, and decide for yourself whether it aligns with your sustainability values. There is no right or wrong here – it all depends on your personal values.

Types of Sustainable ETFs: An Overview

There’s a broad range of sustainable ETFs that focus on different themes. Generally, these can be divided into sustainable versions of classic global ETFs, like the MSCI World, or sustainable thematic ETFs that specialize in specific sustainability themes like renewable energy, water treatment, or sustainable agriculture.

Both types have pros and cons. A thematic ETF can more accurately represent a sustainability aspect since it focuses on a single (sustainable) sector. However, this comes with a high concentration risk since you’re dependent on just one sector. You may want to consider adding other (sustainable) sectors or globally diversified ETFs to enhance diversification.

With global ETFs like the MSCI World ESG, it’s the opposite. You have extensive diversification by covering the global economy across various countries and regions. However, in terms of sustainability, this can be a drawback. Due to the broad coverage, these ETFs often include companies from industries or with products that aren’t sustainable. Take a look at such an ETF we evaluated to see how we’ve assessed it according to our methodology.

The Best Tools and Platforms for Evaluating Sustainable Investments

Without too much self-promotion, we encourage you to try our tools for searching sustainable ETFs and stocks. Evaluating sustainable investments doesn’t have to be complicated. Our mission is to provide sustainable investors with the best support for their investment journey. We’d love for you to try our tools and give us your feedback.

Risks and Opportunities in Sustainable Investing

Sustainable investing offers many benefits, like promoting environmentally friendly business practices and supporting socially responsible companies. However, there are some risks to be aware of.

Since companies are filtered out, you should pay special attention to ensuring adequate diversification with sustainable ETFs.

Another risk in sustainable investing is greenwashing. This can occur with products that seem green but aren’t, or with how companies present themselves.

Despite these risks, sustainable investing is an excellent way to achieve financial returns while fostering positive social and environmental changes.

Conclusion

It’s worth noting that sustainable investing is not just a trend but a movement and a responsible way to allocate capital. By incorporating ESG criteria into your investment strategy, you can ensure that your investments are not only profitable but also have a positive impact on the world.

Use tools like ESG ratings, sustainability reports, or our Impact Check to select the right companies and ETFs, and always keep in mind the opportunities and risks. With the right strategy, you can achieve both ethical and financial goals.