When it comes to investing, does the phrase “Greed is good” resonate with you? If we’re being honest, greed does have a part to play in what drives us to beat inflation and grow our wealth. But we’re also here to tell you that being greedy and being green aren’t mutually exclusive! That’s the beauty of sustainable investing. It’s the intersection of earning a profit while continuing to do good for our environment. To bust a common misconception, going green does not mean you are getting the shorter end of the stick. In fact, you might be getting more.

What is sustainable investing and how does it work?

Sustainable investing (also known as impact investing) refers to investments that, in addition to financial factors, consider environmental, social and governance (ESG) factors in the investment decision-making process. These ESG factors can cover an extremely broad range of issues – from avoiding investing in tobacco companies to financing clean water and energy initiatives.

Source: Fidelity International, PRI, 2018. For illustration purposes only.

Common terms associated with sustainability

Sustainability has been a buzzword for a while now, and more investors have been shifting to align their investment portfolios with internationally recognised sustainability goals such as the Paris Agreement and the UN’s Sustainable Development Goals (SDG). You probably would have heard these words floating around in the media, but what exactly do they mean?

• Climate change: This refers to long-term shifts in temperatures and weather patterns. Human activities have been the main driver of climate change, primarily due to the burning of fossil fuels like coal, oil and gas. Consequences of climate change include intense droughts, water scarcity, severe fires, rising sea levels and declining biodiversity.
• Conference of the Parties (COP): This is the decision-making body responsible for monitoring and reviewing the implementation of the United Nations Framework Convention on Climate Change. Since March 1995, the COP meets annually where countries gather to submit their plans for climate action. Last year’s conference was the 26th session of the COP (COP26) and it was held in Glasgow, Scotland.
• The Paris Agreement: This refers to a legally binding international treaty adopted by 196 parties at COP21 in Paris on 12 December 2015 to combat climate change. For the first time ever, countries were unanimous in their decision to work together to limit global warming to a bold target of 1.5°C. The Paris Agreement works on a 5-year cycle of increasingly ambitious climate action carried out by the countries.
• Global Objective & Key Result (OKR): The world’s OKR is to secure global net-zero carbon emissions by 2050 and to limit global warming to 1.5°C by 2100. Why 1.5°C? Well, at 1.5°C, there’s a good chance we can prevent most of the ice sheets from collapsing. If we were to cross over to 2°C, these ice sheets could collapse which would cause sea levels to rise to 10 meters (30 feet). To put things into perspective, 1/3 of Singapore’s land is less than 5 meters above sea level! That’s not even the worst-case scenario. At 3°C, many regions would suffer from “unlivable heat”, meaning an enormous depletion in biodiversity and a drastic drop in food security. Not to mention, most urban infrastructures don’t have the capacity to cope with such extreme weather conditions.
• Sustainable Development Goals (SDGs): In 2015, the United Nations set out a collection of 17 interlinked global goals designed to be the "blueprint to achieve a better and more sustainable future for all". All countries – developed or emerging – are jointly guided by these 17 global SDGs, which at the core, aim to end poverty, protect the planet, promote good well-being, as well as bring peace and prosperity to all. Companies can choose to adopt a few SDGs as their core focus to guide their business and sustainability strategies.
• Greenwashing: Greenwashing refers to the cynical practice of applying a sustainable “label” to a fund, while disregarding the core ideas of sustainable investing. Unfortunately, the lack of standardisation of what constitutes a sustainable investment opens the door to greenwashing. It is not uncommon to see many companies and businesses slap on a “sustainable” or “green” label to attract investor money. To improve credibility and counteract greenwashing, companies can adopt ESG ratings by professional investment research and rating agencies such as Morningstar and Morgan Stanley Capital International (MSCI). New regulations, such as the Sustainable Finance Disclosure Regulation (SFDR), have also come into play.
• SFDR Article 6, 8 and 9: Under the new SFDR that came into effect in 2021, asset managers are required to classify their funds as either an article 6, 8 or 9 fund, depending on their level of sustainability. Article 6 covers funds without a sustainable scope in their investment process (i.e. funds that invest in tobacco companies or thermal coal producers). Article 8 covers funds that promote environmental or social characteristics and have good governance practices. Article 9 covers funds that make a positive impact on society and/or the environment through sustainable investment and have a non-financial objective at the core of their offering.

Examples of sustainable investments

Sustainable investments have evolved greatly – and rapidly – in recent years as countries come together to collectively protect our planet. Common examples of sustainable investments include green loans (car/housing), green bonds, green funds and carbon credits.

Do good and earn more

Given the increased global focus on combating climate change, the business activities and green efforts of many companies are now under tighter scrutiny. Brands that fail to act responsibly for the planet are boycotted and become a lesson learnt by other firms, pushing businesses towards a path of building a “greener future”. Notwithstanding the positive publicity, it’s been largely observed that companies who “do good” tend to profit financially as well. History has demonstrated that these benefits are cascaded down to investors. While past performance does not guarantee future results, sustainable funds have outperformed in the pandemic-driven sell-off of 2020. The evidence also indicates that this trend of outperformance has persisted over the longer term.

Why invest in sustainable funds

Here are 3 reasons why sustainable investments can and should be incorporated into your investment portfolio:

• Driving greater change: The biggest pro for investing in sustainable funds is simply to encourage the shift towards more sustainable business practices. Sustainable investing provides a way for investors and consumers to actively show the kind of businesses they’d like to support. Powerful – and necessary – change for the greater good.
• Capital appreciation: Accelerated by the pandemic and a period of outperformance, the number of sustainable funds and their asset sizes are poised to grow even further. As previously mentioned, historical returns are not indicative of future growth, but they do tell a story. Investors can look forward to capital growth and potentially earning a neat profit with sustainable investments.
• Risk management: Sustainable investing can be seen as an evolution of traditional investment principles of maximising shareholder value and minimising risks. How so? For example, investing in a company with low ESG standards may expose the portfolio to a variety of risks faced by said company, such as worker strikes, litigation and negative publicity. This, in turn, might result in lower future returns. In other words, monitoring the ESG credentials of an investment can lead to better risk-based judgements.

Sustainable fund ideas