Sustainable Investing: A Beginner's Guide

Key points in a nutshell:

• Sustainable investing involves investing in companies or projects that have positive social and environmental impacts.
• Different sustainable investing approaches include positive and negative screening, best-in-class, integration of environmental, social and governance (ESG) aspects, and impact investing.
• Sustainable investments can take the form of investment funds, sustainable certificates, or exchange traded funds (ETFs).
• The sustainability of an investment product can be determined through certifications, standards, or sustainability ratings.
• Sustainable investing is easier than ever with providers like radicant.

1. What does sustainable investing mean?

With the introduction of EU regulations on sustainable finance and the Sustainable Finance Disclosure Regulation (SFDR), a definition of sustainable investments has emerged.

It refers to investing in a company's economic activities that contribute to environmental or social goals, provided that such investments don’t significantly harm these goals and that the invested companies practice good corporate governance practices.

In recent years, the investment landscape has undergone a paradigm shift. The traditional approach that only emphasised financial returns has given way to a new philosophy that considers economic gains as well as ESG aspects.

This approach is known as sustainable investing. Sustainable investing has garnered significant attention and interest from individual and institutional investors alike. The 2023 Market Study carried out by Swiss Sustainable Finance (SSF) estimates sustainability-related investments at CHF 1.61 trillion, including around 52 % of all investment funds in Switzerland.

At its core, sustainable investing considers three elements often referred to as environmental, social and governance (ESG) factors.

• Environmental relates to how a company's activities affect the planet, including carbon emissions, renewable energy usage, water management, and waste disposal.
• Social refers to how a company treats its employees and the communities in which it operates. This includes factors like human rights, labour standards, health and safety, and community relations.
• Governance pertains to corporate governance, executive compensation, internal controls, and shareholder rights.

ESG factors primarily represent the risks that could impact a company's financial performance. ESG ratings assess how a company manages these risks.

Sustainable investing considers these ESG criteria when making investment decisions. Beyond ESG aspects, it also recognises the importance of aligning investments with the values of investors and their societal impact. It's not only about avoiding harm or managing risks but also achieving a positive impact on society and the environment through investments.

2. Why should you invest sustainably?

Sustainable investing offers numerous advantages. Firstly, it allows for both market-comparable returns and a positive impact on society and the environment.

Companies prioritising sustainability practices are often better equipped to face the challenges of our world, offering appealing investment opportunities. They tend to be more innovative, efficient, and resilient to risks. This can lead to higher profits, lower volatility, and better long-term returns.

Sustainable investing can also contribute to diversifying your portfolio and reducing risks. Companies focusing on sustainability often operate in different industries and regions, helping to spread risk and enhance portfolio resilience.

Ultimately, sustainable investing is a matter of personal values. Many individuals wish to invest their money in a way that aligns with their beliefs and values.

1. Overview of sustainable investment approaches

Sustainable investing doesn't adhere to a fixed formula. Instead, there are different ways to incorporate ESG factors into the investment process. Depending on investors' preferences, risk tolerance, and desired effects, the approaches can vary. Here's an overview of the most common sustainable investing methods:

• Positive screening: Positive screening involves selecting companies that meet specific ESG criteria, such as renewable energy use or gender diversity at management level.
• Negative screening: In contrast, negative screening excludes companies or sectors engaging in practices conflicting with investors' values, such as fossil fuels or tobacco.
• Best-in-class: Best-in-class refers to targeted investment in companies being industry-leaders in terms of ESG criteria. These companies stand out for their exceptional ESG practices.
• ESG integration: ESG integration involves incorporating ESG criteria into traditional financial analysis. It acknowledges that ESG factors can impact a company's financial performance and risk profile. Rather than excluding or favouring specific companies, ESG integration considers how a company's ESG practices can affect its value.
• Impact-oriented investing: Impact-oriented investing, also known as SDG (Sustainable Development Goals) investing, aims to align investments with the UN's 17 SDGs. It prioritises investments contributing to these global goals, like providing accessible healthcare or addressing climate change.
• Impact investing: This approach goes beyond harm reduction or risk management –it's about having a positive impact. Impact investors aim to achieve measurable social and environmental benefits alongside financial returns. Examples include investing in a company providing affordable housing or a fund supporting clean energy projects.

3. What types of sustainable investment exist?

Various options for sustainable investing are available, catering to different investor interests, such as:

• Sustainable funds: Sustainable investment funds pool money from multiple investors to invest in a diversified portfolio of sustainable securities, such as shares or bonds. These funds vary in strategies; some focus on specific sectors, themes, or ESG performance levels. These include impact-aligned or SDG-aligned funds, ESG funds, or impact investing funds.
• Sustainable certificates: Actively managed certificates (AMCs) are financial instruments that replicate an asset's performance, such as a share’s. This allows investors to participate in the performance of a share, market, or benchmark without actually owning the underlying stock directly. AMCs are flexible and accessible and can follow a sustainable investment approach. At radicant, you can invest in eight different sustainable certificates aligned with the UN's 17 SDGs. Find out more on our product page.
• Sustainable ETFs: Exchange traded funds (ETFs) are investment funds traded on exchanges. Sustainable ETFs track indices of specific markets or themes, following a particular approach. They can comprise companies that have excluded specific sectors or possess ESG ratings. They offer an easy and affordable way to access a diversified portfolio of sustainable securities.

4. How can you determine if an investment product is sustainable?

Determining the sustainability of an investment product can be challenging due to the lack of standardised definitions. However, certain key indicators can assist you in this regard. Certifications and standards, such as the EU Green Bond Standard or the German FNG (Forum for Sustainable Investment) seal, can provide initial insight into an investment product's sustainability.

The EU's Sustainable Finance Disclosure Regulation (SFDR) aims to promote transparency in investment decisions regarding sustainability risks and opportunities. It distinguishes between:

• SFDR Article 6: Non-sustainable funds that only consider very limited ESG risks in the investment process.
• SFDR Article 8: "Light green" funds that consider sustainability risks in the investment process and promote environmental or social characteristics.
• SFDR Article 9: "Dark green" funds that consider sustainability risks in the investment process and, in addition to financial goals, pursue a specific sustainability objective by contributing to environmental or social goals.

The concept of "double materiality" is central to SFDR and the whole EU regulation on sustainable financial investments.

Good to know: What does "dual materiality" mean? It doesn't only refer to how external factors like the environment and society affect a company's business model but also how the company impacts its ecological and social environment. It's about the mutual relationship between the company and its surroundings.

Additionally, corporate reports and data can offer further insights into a company's sustainability practices. It's important to be critical and look beyond mere marketing jargon.

• Consider certifications and standards: Certifications like the EU Ecolabel for Retail Financial Products or adherence to standards like the UN Principles for Responsible Investment (UNPRI) can indicate an investment product's commitment to sustainability.
• Look for sustainable investment labels: Labels like the FNG seal, Label ISR, Greenfin Label, LuxFLAG, and the Austrian ecolabel are also excellent indicators of sustainable investment products. These labels are awarded by independent entities to investment products meeting specific sustainability criteria.
• FNG seal: This German seal is awarded to sustainable investment funds meeting a comprehensive criteria catalogue, including transparency, credibility, and strong ESG integration.
• Label ISR: This French label certifies funds that implement an ESG approach in their management and maintain a policy of continuous investor information and transparency.
• Greenfin Label: This French label guarantees that the investment contributes to the energy and ecological transition and meets stringent ESG criteria.
• LuxFLAG: This Luxembourg-based label offers various certifications for responsible investment products, covering areas like ESG, environment, microfinance, and climate finance.
• Austrian ecolabel: This Austrian environmental label is awarded to various products and services, including sustainable financial products adhering to rigorous environmental and ethical standards.
• Check corporate reports: Companies committed to sustainability often publish sustainability or corporate social responsibility (CSR) reports. These provide insights into a company's ESG practices.
• Use sustainability ratings: Several independent agencies offer sustainability ratings for companies and investment products. These can help you quickly give you an overview of a product's ESG performance.

Methodology of radicant: We take "real sustainability" seriously and employ a robust methodology to determine the sustainability of our investment products. We've developed a unique rating system ensuring that all companies in our portfolios contribute positively to the UN's SDGs and thereby to the sustainable development of our planet. More details can be found here.

5. Sustainable investing made easy (with radicant)

Sustainable investing might seem complex at first glance, but with the right providers, it's actually quite straightforward.

This is where radicant comes in! radicant is Switzerland's first digital sustainability bank, offering everything you need to start with sustainable investing.

Sustainable investing with radicant is fast, simple and possible with as little as CHF 1,000. To get started, all you need to do is to download the radicant app and follow the instructions. You can set up your investment management mandate in just a few minutes, define your preferences, and make your initial deposit. From there, we'll take care of the rest.

With radicant, you'll invest in a highly diversified portfolio, expertly crafted by our investment team. You can decide whether to focus more on Swiss companies or which sustainability themes are particularly important to you.

Regardless, all these companies contribute positively to the SDGs. Our investment team experts use our unique rating system to ensure your selected portfolio combination consistently supports sustainability goals.

Moreover, you can get a comprehensive overview of your portfolio in your radicant app, with details of our rating for each individual company. This clearly shows how each company contributes to a sustainable and liveable future.

6. Conclusion: Investing sustainably

Sustainable investing is more than just a trend – it's a necessity in today's world.

It not only offers the chance to achieve market-comparable returns but also to have a positive impact on society and the environment. By considering ESG factors, we can support companies advocating for sustainable practices and simultaneously achieve attractive returns.

Different approaches to sustainable investing, from positive and negative screening to best-in-class and ESG and impact investing, provide various characteristics and benefits. There's a range of sustainable investment products available, including savings accounts, funds, and ETFs.

It's crucial to assess the sustainability of an investment product to avoid "greenwashing." Certifications, standards, corporate reports, and sustainability ratings can help confirm a product's sustainability.

Sustainable investing is easy and accessible with radicant. Starting with as little as CHF 1,000, you can embark on genuinely sustainable investing and benefit from impactful investing! Another plus, we offer 100 % sustainable banking – with a card made from recycled plastic and a carbon tracker to monitor your carbon footprint.

Ready to get started? Open your radicant account in less than 5 minutes – digitally, hassle-free, and without any paperwork.

FAQs

Where can I invest sustainably?

Many providers offer sustainable investments, including brokers, asset managers, and banks. You can invest in sustainable funds or investment mandates. With radicant, you can invest conveniently and sustainably through our app.

What are the benefits of sustainable investments?

Sustainable investments offer numerous advantages. For instance, by investing, you can make a positive contribution to issues like climate protection and social justice, creating the foundation for a sustainable future on our planet.

Furthermore, given global challenges like climate change or resource scarcity, sustainable investments are often better positioned to profit from future market changes and technological trends. This can lead to better long-term returns.

How safe are sustainable investments?

All investments carry risks, and your risk profile is always considered. Generally, sustainable investments don't carry greater financial risks than traditional investments. Moreover, they aim to mitigate sustainability risks.

How competitive are the returns of sustainable investments compared to traditional investments?

In principle, sustainable investments aim to achieve market-competitive returns. Various studies have compared the returns of sustainable and traditional investments, yielding diverse and generally applicable results. Sustainable investments assume that certain business practices and industries inherently carry sustainability risks that should be avoided in the long term.

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