Sustainable Investing: Definition, Principles, and How It Works

Sustainable investing is gaining popularity as more investors look to combine financial returns with ethical values and responsible investment strategies.

It offers a way to invest in companies that are not only profitable but also environmentally conscious, socially responsible, and governed well.

In this article, you’ll learn what sustainable investing entails, why it’s becoming more popular, and how you can start investing sustainably.

What is Sustainable Investing?

Sustainable investing focuses on companies, ETFs, and funds that meet high ethical and environmental standards. It’s about achieving financial returns while making a positive impact on the environment and society.

Definition and Core Principles of Sustainable Investing (ESG, SRI)

Sustainable investing can be defined through various approaches, with ESG criteria (Environmental, Social, Governance) playing a central role. It’s about choosing companies that follow responsible business practices while also being financially successful. The two most common approaches in sustainable investing are:

ESG Investing: ESG stands for Environmental, Social, and Governance. These criteria are used to evaluate companies that operate sustainably and uphold social and environmental standards.

SRI (Socially Responsible Investing): SRI is another form of ethical investing that excludes companies violating certain ethical or religious principles. This can include businesses involved in fossil fuels, weapons, or tobacco.

ESG Criteria: Environment, Social, and Governance

The ESG criteria are at the heart of sustainable investing, helping investors identify companies that are both financially stable and ethically responsible. Here’s an overview of each criterion:

Environmental: This aspect assesses how a company manages resources, including climate protection, energy consumption, waste management, and emissions. Companies working in areas such as renewable energy or environmentally-friendly technology often score well in this category.

Social: This criterion examines how a company treats its employees, customers, and society. Key considerations include fair labor practices, diversity, human rights, and community engagement.

Governance: This focuses on corporate governance. Aspects like transparency, ethical business practices, anti-corruption policies, and board diversity are evaluated here.

At money:care, we also consider many of these factors when assessing stocks and ETFs. If you’re interested in learning more, you can read about our methodology.

Why Sustainable Investing is Growing in Popularity

Interest in sustainable investing has surged in recent years. More and more people, like you, are drawn to investments that are not only profitable but also ethical and impactful.

The Growing Demand for Ethical and Sustainable Investments

The demand for sustainable investments is increasing for several reasons:

Shifting Awareness: Many people are now more aware of environmental and social issues and want their money to be invested in companies that offer sustainable solutions. Issues like climate change, social inequality, and ethical business practices are increasingly in the spotlight. In our Impact Check, you can filter based on criteria related to climate, society, and gender.

Long-Term Trends: Sustainable investing aligns well with long-term megatrends such as the energy transition, circular economy, and the growth of sustainable technologies. Companies that embrace these trends early on may be more successful in the long run.

Regulatory Support: Governments in many countries encourage sustainable investments through tax incentives or legislative measures. In the European Union, for instance, the Green Deal plays a significant role in advancing sustainable investments.

How Sustainable Investing Can Drive Positive Change

Sustainable investing not only provides an opportunity to earn returns but also a chance to create positive change. By directing capital to companies that prioritize environmentally-friendly technologies and social justice, investors help drive innovation and contribute to solving global issues.

For example, renewable energy is gaining importance. By investing in companies focused on solar, wind, or hydropower, investors support the shift to a sustainable energy economy and help reduce CO2 emissions.

H2: How Private Investors Can Invest in Sustainable ETFs and Stocks

Sustainable investing is accessible to individual investors as well. With sustainable ETFs, stocks, and funds, you can build a diversified portfolio that is both financially rewarding and ethically sound.

Options for Sustainable Investing in Stocks, ETFs, and Funds

There are various ways to invest sustainably:

Sustainable ETFs: ETFs (Exchange Traded Funds) offer a cost-effective way to invest in a variety of companies that meet sustainability criteria. Since ETFs include numerous companies, it can sometimes be difficult to look behind the scenes. Our ETF Search helps you gain transparency by showing you how sustainable the companies within each ETF are.

Sustainable Stocks: With stocks, you can be more selective. You can directly invest in sustainable companies operating in sectors like renewable energy, sustainable agriculture, or green technology. Our Stock Search provides great examples of potential companies. However, remember to ensure sufficient diversification when investing in individual stocks.

Funds: Many actively managed sustainable funds apply ESG criteria to invest in ethically sound companies. These funds often offer broader diversification and a more active selection of top companies. However, actively managed funds also tend to have higher fees.

Tools and Platforms for Choosing Sustainable Investments

Our tools help you find the right sustainable investments. We strive to make the sustainability of ETFs and stocks as transparent, authentic, and understandable as possible.

You can use our Impact Check to filter stocks and ETFs according to your preferences.

If you’re interested in gender-equitable companies, for example, you can select criteria like “Women on Board” or “Gender Pay Gap” in our search tool. This will show you only those companies that meet these standards.

We don’t create these criteria ourselves but instead collaborate with UNRISD, a United Nations sub-organization. If you’d like to learn more, feel free to explore our methodology.

Conclusion

Sustainable investing offers individual investors the chance to invest responsibly and achieve long-term returns. By considering ESG criteria, you can ensure your investments are not only financially successful but also ethically sound. With the right tools, you can find sustainable ETFs and stocks and build a sustainable portfolio.