3 tips for ETFs, funds and more

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Do you want to invest your money in a fund or ETF, but do not want to support companies that rely on coal and nuclear power, manufacture weapons or are involved in child labor? Three tips for sustainable investments.

Unpackaged food, less air travel, no meat: Many of us consciously make more sustainable decisions in everyday life. It doesn’t have to end with consumption. Our money can also do something good for the environment and humanity, while it generates a return. Three tips will help you find a sustainable investment.

Sustainable finance has long ceased to be a niche topic, says Professor Tobias Popovic. He has been researching the subject at the Stuttgart University of Applied Sciences for over ten years. “The fact that you have to choose between ecology and economy is an incorrect, but unfortunately still widespread prejudice,” says Popovic. Well-founded studies would show that the relationship between return and risk with sustainable investments is no worse than with conventional alternatives.

German private investors collectively have significantly less capital than large investment companies like Blackrock. Nevertheless, we could help steer financial flows in a sustainable direction.

Sustainability encompasses many areas in which companies can take responsibility. A uniform taxonomy, i.e. a common language for what is understood by sustainable management in the EU, does not yet exist.

However, the ESG criteria provide guidance. They are considered the standard for sustainable investments, but critical voices do not go far enough. Behind the three capital letters there are three sustainability areas:
E = environment
These include environmental factors such as pollution or threat to the environment, emissions of greenhouse gases or the use of finite resources.
S = social
The social pillar includes aspects such as occupational safety and health protection for employees of the company, the diversity of the employees or the social commitment of the organization.
G = governance
The third pillar of sustainability is about corporate management. This includes, for example, the established corporate values ​​or management and control processes.

In order to keep the risk low, fund managers put the money invested in many different company stocks or other asset classes. With ETFs too, the money is invested in a large number of companies. That makes it tedious to get an overview of how sustainable the individual companies are.

A simple solution seems to be financial products that have additions such as “sustainable” or “green” in their names. But “sustainability” is not a protected term. Standards are only just being formulated, for example as part of the EU action plan for financing sustainable growth, which is part of the “Green Deal”.

“A new market for sustainable investment products is emerging. Many suppliers smell the morning air, ”says Popovic – a market that cannot be overlooked without general financial education and sustainability-related knowledge. Popovic advises consulting independent agencies to find a product that has a transformative effect. “There are now a number of tests, studies and platforms that contribute to the transparency of sustainable investments,” says the sustainable finance expert.

Life insurers, fund managers and banks are typically not required by law to disclose sustainability-related information about their financial products. However, many providers advertise that their investment products are based on ESG or other sustainability criteria. But that is not a guarantee that it will be managed sustainably. The ESG criteria are also criticized as inadequate and can be interpreted with varying degrees of rigor. For example, a company that does not produce coal could be portrayed as an investment opportunity that is “coal free”. But if the company uses coal-based electricity for production, the investment indirectly supports coal mining.

There are various portals and providers for this. For example, in February the Stiftung Warentest tested funds and ETFs according to ethical-ecological criteria. Here it goes for comparison. Cleanvest is a comparison portal that has given sustainability ratings to over 4,000 funds and ETFs. You can filter according to ten criteria on the free platform of the Austrian social enterprise ESG Plus. Other NGOs or consumer protection associations can also be points of contact for comparing financial products.

“Don’t put all your eggs in one basket” is an old stock market adage and is also important for building a sustainable portfolio. the Federal Financial Services Agency (Bafin) warns of cluster risks from unilateral investments. For example, those who only invest in companies that deal with renewable energies cannot compensate for price drops with profits in other industries. This also applies to the selection of funds and ETFs for your own portfolio.

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