Sustainable investing: What is it and how does it work?

More and more investors in Switzerland want to achieve not only a financial return, but also a positive social and environmental impact. This blog shows you what sustainable investing is and how you can invest your money sustainably.  

Sustainability is not only playing an increasingly important role when it comes to traveling, eating, or shopping. Factors such as a company’s environmental footprint or its production standards are also becoming more important when investing money – for both private and institutional investors such as AXA.

“Investing money sustainably” describes investments in companies that act sustainably with regard to certain factors or that take certain sustainability aspects into account in their business activities.  In addition to the typical investment criteria such as return, risk, and liquidity, sustainable investments also take additional factors into account, including social, environmental, and ethical considerations. There are a variety of options and principles for investing your money responsibly and sustainably. Some of them are listed in this article.

Criteria and concepts of sustainable investing

ESG criteria are one of the most common concepts for sustainable investing in Switzerland and internationally. ESG stands for Environment, Social, and Governance. ESG criteria assess companies in terms of their impact on protecting the environment, on society (e.g. equality and inclusion), and in terms of responsible corporate governance.

In addition to ESG criteria, there are other concepts for sustainable investments:

• Supporting the Sustainable Development Goals (SDGs): Investments can be evaluated according to whether they support one or more of the 17 United Nations Sustainable Development Goals – investors thus invest in companies with SDG titles.
  
• Science-based targets: The “Science-based Targets” initiative comprises more than 6,000 companies that have set themselves scientifically based and validated targets for reducing greenhouse gases.
  
• EU Taxonomy for Economic Sustainability: The EU has defined six sustainable development goals. Where the activities of a company contribute to one or more of these objectives without affecting another, the economic activities shall be considered environmentally sustainable. These objectives include not only climate protection but also the sustainable use and protection of water and marine resources, or the restoration of biodiversity and ecosystems.

Historical development says: Stock markets are rising

A look at the global historical performance of equities compared to bonds is also revealing: Equities manage to overcome even major market crises – such as the 2008 financial crisis or the COVID-19 pandemic. Share prices often even rise disproportionately after times of crisis. Important here too: Long-term thinking pays off (in the truest sense of the word).

Sustainable investing: The most common strategies 

If you want to take sustainability criteria into account when making investment decisions, you can fall back on a variety of criteria. Simply put, this strategy includes avoiding, integrating, or influencing certain companies based on sustainability aspects such as ESG criteria. In practice, for example when setting up investment funds, the following strategies are usually used:

Screening & exclusion 

This strategy excludes companies on the basis of certain criteria. Is environmental protection particularly important to you? For example, you could “exclude” all oil and coal companies from your portfolio or not include them. However, this could entail risks in terms of  diversification if there are too many exclusions.

Integration according to ESG criteria 

Under this approach, investment decisions are made taking into account all key factors – financial and ESG criteria. In contrast to the screening & exclusion strategy, ESG integration focuses on taking into account companies that have committed themselves to sustainable strategies and thus achieve a measurable positive environmental or social impact.

Best in class 

Within an industry, ESG criteria are used to identify the “best-in-class”. This eliminates the risk of low diversification and can create an incentive for the sector in question to act more sustainably. This approach can include investing in companies that you would consider to be “bad” based on your values. There are companies in the oil industry that act more sustainably than others.

Thematic investment 

This strategy focuses on a specific, usually particularly high-growth, sustainability issue such as renewable energies. These issues are often referred to as megatrends where long-term growth is expected.

In other words, thematic investing means investing in companies whose business activities are related to a particular sustainability theme.

Other strategies for sustainable investing 

While the strategies described above are among the most common approaches and are also used in actively and passively managed funds, there are other strategies such as active ownership and impact investing:

Active ownership: Under this strategy, the company shares are used to actively use its voting rights with sustainable intent. In addition, there is an active exchange/dialogue with the company (“engagement”).

Impact investing: Impact investing explicitly involves investments in companies that aim for/achieve/have a measurable environmental or social impact. Even if a financial return is sought, it is secondary in this approach.

How do I invest my money sustainably?  

In principle, the approach to sustainable investing is the same as that of a “normal” investment. You should think about your financial goals, define an investment strategy based on your personal risk profile, diversify your investments, and invest regularly and over the long term.

However, there are other points to consider when it comes to investing sustainably. For example, investors should consider the following aspects:   

• Personal values: What is important to you? Which sustainability aspects and topics are particularly important to you? Find out which environmental, ethical and social objectives should be part of your investment strategy.
  
• Exclusion criteria: Where do you set your limits? Which topics or companies are out of the question at all? With exclusion criteria, you ensure that your money is not invested in topics or companies that you do not want to support.
  
• Choose the right strategy: Choose the right strategy based on your financial goals and personal values. But note that in reality, it is often difficult to find an investment strategy that is 100% in line with all your values and criteria. Therefore, choose the solution that best matches your values and objectives.

Investing sustainably with funds or asset management

Private investors have the option of investing directly in companies that match their sustainability criteria. However, a detailed examination of all the companies in a diversified portfolio is very time-consuming.

Another option is to invest in sustainable funds. These funds often use one or more of the strategies listed in this blog. One example is our SmartFlex pension plan or the SmartFlex investment plan. With these investment products, AXA makes it possible to invest in themes with different sustainability strategies. With the theme “Sustainability,” the focus is specifically on sustainable investments. This allows investors to invest their money flexibly, simply, and sustainably.

Last but not least, there is also discretionary management, which allows investors to actively and professionally manage their money. Here, investment decisions are made according to individual needs and may, of course, also include sustainability aspects. If you’re looking to invest sustainably, it’s always a good idea to talk to an expert to help you develop an investment strategy that matches your personal values and wishes.