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GLOSSARY

ASK

Take a closer look at the product information sheet to determine how “green” the investment product really is and whether it corresponds to your own ideas of a sustainable investment.
It is always advisable to ask your financial advisor for a sustainability rating, but keep in mind that there are currently no uniform standards regarding ESG ratings and instead products that correspond to the EU taxonomy are usually used as a reference. The Taxonomy is a special classification system that creates at least a unified understanding of the sustainability of economic activities.
Ask your financial advisor to explain the sustainability approach to you in detail and make sure to ask them questions on the topic in order to obtain unbiased advice towards investment options.
For example:
Do you have significant knowledge of climate science and climate risk as it relates to investment analysis (e.g., an understanding of the differences between physical and transition risks and their characteristics)?
Are you familiar with the work of various industry groups that focus on ESG/sustainability (e.g. PRI, Climate Action) and regulatory disclosure requirements from IFRS, ISSB and others?

CHECK

Before you invest in an equity fund, you should consider the following:

Documents such as the prospectus, the investor information (KIID) and the website of the funds or the fund company about the most important points for you, e.g. costs, risk etc.

Check the investment policy, the investment objective and the fund volume (larger funds correspond to better chances of seeing a return in the long-term).
Whether the fund is active or passive (if active, check whether the fund refers to a benchmark and past performance). It should be noted that past perfomance is only used as reference to reaching benchmark and not an exclusive indication of success for the future.

You should also consider the fees, inflation rate and effect on returns as well as whether the fund product offered is classified as UCITS fund (which usually offers more transparency).

REMEMBER

Returns – As a growing industry, sustainable assets and funds worldwide are seeing an increase of net returns, despite those who have previously avoided sustainable investing, fearing it would reduce returns. While a growing body of research suggests that even so-called sustainable funds do not perform worse than traditional funds in terms of the achievable return, you should always base your decision on your personal circumstance, risk appetite and goals.

Risks – Investing in solar systems or wind farms has repeatedly shown in the past that sustainable investments for example are not associated with lower risks than classic products. You should check this carefully before investing.
For further information on terminology, definitions etc. used throughout this guide, please refer to our glossary here.
You can find out what greenwashing means and how to spot it as an individual retail investor as well as the steps you could take to prevent your involvement in such practice here.

Keep in mind that when a company announces a commitment to human rights or clean energy for example, it doesn’t necessarily mean it will follow through and you should use your rights as a shareholder to engage with the company whenever possible. For further stakeholder engagement guidelines please see here.

In general, those who seek sustainable investing gain a more holistic view of the companies they support, which can help mitigate risk and identify opportunities for growth and improvement.

Before investing, you should carefully examine which of the above approaches and which product best suits you and your needs. For example, are ecological aspects of your system important to you, or are they more social? In addition, the general investment rules, such as risk diversification, availability, minimum investment volume, etc. should not be ignored.

With an estimated addition of 2 billion people by 2050, global demand for food, water and energy will drive the need for innovative improvements in infrastructure to address the resource demand associated with a growing population and climate change. Clean water and sanitation, innovations in energy generation and distribution, improved health care, and more efficient transportation provide an abundance of opportunity for sustainable investment growth. Industries like electric cars are the future of transport, while divesting from fossil fuel companies could mean you’re immune to a carbon tax.

Additionally, the ongoing and constantly increasing environmental actions worldwide regarding our accelerated climate changes, make it apparent that investors want companies to provide more sustainability disclosures that are material to financial performance.

Returns – As a growing industry, sustainable assets and funds worldwide are seeing an increase of net returns, despite those who have previously avoided sustainable investing, fearing it would reduce returns. While a growing body of research suggests that even so-called sustainable funds do not perform worse than traditional funds in terms of the achievable return, you should always base your decision on your personal circumstance, risk appetite and goals.

For further information on terminology, definitions etc. used throughout this guide, please refer to our glossary here.

You can find out what greenwashing means and how to spot it as an individual retail investor as well as the steps you could take to prevent your involvement in such practice here.

Keep in mind that when a company announces a commitment to human rights or clean energy for example, it doesn’t necessarily mean it will follow through and you should use your rights as a shareholder to engage with the company whenever possible. For further stakeholder engagement guidelines please see here.

Any investment that seeks to incorporate sustainability elements alongside financial returns. You may hear sustainable investing referred to as ethical investing, impact investing, socially responsible investing, and values-based investing. While definitions of sustainability vary across jurisdictions and regulatory frameworks around the world, the basic tenet of sustainability refers to ESG factors (Environmental, Social, and Governance) and has been used as a base for sustainable services, products and other investment activity.

In the case of financial products, for example, it must be made clear whether they are pursuing sustainable goals, and investment advisors must ask their customers whether they would like to invest sustainably. Even investors who want to invest directly in companies, be it via shares or bonds, are increasingly looking at sustainability aspects in addition to yield aspects.

Unfortunately, companies do not yet have sufficient sustainability data, which makes it difficult for individual retail investors, but also for analysts or rating agencies to compare companies or financial products. This in turn increases the risk of greenwashing, i.e. the misleading marketing of the extent of “green” product and its actual “green” impact.

What about associated returns?

As a growing industry, sustainable assets and funds worldwide are seeing an increase of net returns, despite those who have previously avoided sustainable investing, fearing it would reduce returns. While a growing body of research suggests that even so-called sustainable funds do not perform worse than traditional funds in terms of the achievable return, you should always base your decision on your personal circumstance, risk appetite and goals.

What are some examples of sustainable investing?

An investment product that avoids negative effects on the environment, such as the emission of greenhouse gases, human rights violations or endangering biodiversity, etc.

An investment product that makes a difference (so-called impact investing), i.e. can achieve a certain proportion of effects, e.g. makes a concrete, positive and measurable contribution to achieving the 17 goals for sustainable development (Sustainable Development Goals, SDGs) of the United Nations.

An investment product that fully applies the EU taxonomy requirements (EU classification scheme for environmentally harmful economic activities) and invests a minimum proportion in ecologically sustainable investments.

An investment product that follows the strategy of targeted investments, i.e. it invests primarily in the areas of “renewable energies” or “green mobility” (according to so-called positive criteria).

An investment product (fund) that actively exercises its voting rights as shareholders in dialogue with the company and its management in order to influence corporate policy (so-called engagement).

An investment product that follows the best-in-class approach, i.e. only invests in the companies that perform best within their industry.

An investment product that deliberately does not invest in companies (principle of exclusion) that are active in certain business activities, such as defence technology/weapons manufacturing, coal or tobacco in

An investment as part of savings or retirement plans in mutual funds that specialise in seeking companies with good labour and environmental practices.

For further information on terminology, definitions etc. used throughout this guide, please refer to our glossary here.

You can find out what greenwashing means and how to spot it as an individual retail investor as well as the steps you could take to prevent your involvement in such practice here.

Keep in mind that when a company announces a commitment to human rights or clean energy for example, it doesn’t necessarily mean it will follow through and you should use your rights as a shareholder to engage with the company whenever possible. For further stakeholder engagement guidelines please see here.

 

Some of this material is adapted from DSW’s guides for retail investors, you can find here

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