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The key to sustainable investment with returns How to recognise true sustainability

02.12.2022 5 Reading Time

klimaVest: Redakteurin Luisa Schaus
Luisa Schaus

Not everything that looks green, is green: sustainable alternatives to conventional investments are in high demand – and for good reason. A sustainable investment combines financial returns with environmental and social impact. On the one hand, you are expanding your portfolio with a crucial part of the future and, on the other hand, you are actively helping to shape the energy transition.

Unfortunately, the high demand is often used for other purposes: many providers paint their investment products green in order to keep up with the sustainability trend and benefit from it – even without making a sustainable impact.

So how can investors identify investments that make an impact? Which investments not only offer stable returns, but also true sustainability?

With these four questions, you can examine your investment for true sustainability. In the following, find out what exactly the individual questions are all about and what needs to be taken into account.

Info: checklist for sustainable investing

Use this short checklist to review your investments in sustainable financial products.

Key questions for sustainable investment:

  • Relation to the real economy: what does the investment have to do with the “real” world?
  • The flow of money: where does capital go?
  • Sustainability goal: what effect does the investment have?
  • Transparency regarding target achievement: how is it measured and what is reported?

How does the investment affect the real economy?

Share prices, stock market speculation, options trading: investments often seem to be just abstract assets that have no real impact on our economy. However, when it comes to climate change in particular, investments that have a direct impact on our real economy play a major role.

Real problems also require real solutions – in the form of investments that ensure a more positive CO2 balance, for example by funding renewable energies or reforestation of destroyed forests. Projects of this kind use your capital to make an immediate and real impact in our economy.

Where does your capital go?

Is your money actually used for projects with an impact or does it remain in the sphere of the financial industry? If you invest your assets in shares with a sustainable impact, any potential positive impact will only occur indirectly. This is because you only buy the shares from the previous owner – the money does not flow directly into the company in question, but only contributes to its stock market value.

In order to have a direct impact, it pays to invest in investment products with a sustainable focus. They enable you to invest in the real economy and secure important potential returns. Investment projects with an impact are investments in the future – and investors have the opportunity to participate in growth early on. This allows you to track your investment in a targeted manner.

What is the impact of your investment?

Impact matters – but who determines what impact is truly sustainable?
With the European Green Deal, the EU has set itself a clear framework for this: sustainable business means protecting the climate, restoring biodiversity and ecosystems, and the transition to a functioning circular economy.

Impact-oriented investments, especially impact funds, are based on these environmental objectives and make their performance and results concretely measurable. Measurability also creates transparency – the impact can be seen and has a positive effect on returns. Only real impact leads to growth and ensures that a sustainable investment will continue to exist in the future.

At the same time, some objectives may not be achieved, while other objectives suffer significant damage – this is defined by the "do no significant harm" principle.

The more concretely the impact objectives are set, the better they can be examined – which brings us to the point of measurability and transparency.

How is the impact of the investment measured and how is it reported?

How much transparency does your investment give you about the impact achieved? Sustainable investments such as impact funds have made it their mission to combine environmental and social sustainability with financial returns. In order to meet both aspects equally, investors should be regularly informed as to whether the desired impact has actually been achieved – and how. This includes, for example, exact statements, figures and facts about how much green electricity a renewable energy fund was able to produce or how much carbon was saved.

If no concrete figures and information are provided, it does not necessarily mean that your investment has not been used sustainably – but only the greatest possible transparency gives you the necessary certainty.

Using these points, you can distinguish sustainable investments from pale green trendy products – and thus create the conditions for your investment with real impact. A plus for the environment and your portfolio. Good luck!

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