Over the last few years, sustainable investing has been on the rise. Women, especially, are fueling the rise of ESG investing, with a recent study showing that 59% of female financial advisors are more interested in using sustainable investment funds in comparison to men (39%). But while this trend overall shows that people’s consciousness is awakening and that there’s a growing demand for social and environmental accountability, investing with real impact is easier said than done. Truth be told, just because there’s a high ESG score on the investment product doesn’t necessarily mean said investment product is truly climate-friendly. In fact, greenwashing is one of the biggest issues in the growing ESG sector due to the lack of clarity and transparency that the ESG scoring has:
“The lack of clarity on the methodologies underpinning ESG scoring mechanisms and their diversity doesn't contribute to enabling investors to effectively compare investments marketed as sustainable, thus contributing to the risk of greenwashing”, says Steven Maijoor, chair of the European Securities and Markets Authority (ESMA).
Before investors can blindly trust the ESG label, ESG ratings should be regulated.
But until this happens, how can you still invest your money sustainably, in a way that does not harm the environment? Here are the 3 tips on making your investments climate-friendly:
1. Look out for the sustainability report
If you can’t find it, it's hidden for a reason. Sustainability reporting should be easy to find, and, again, if it’s not — it probably means that the company doesn’t want you to find it because they have nothing good to report.
A simple Google search should reveal everything you need to know about a particular publicly listed company whose stock you’re interested in buying.
If you do find the report, here are several things to look out for:
A company’s greenhouse gas emissions are classified in three scopes. You want to make sure that the company reports all scopes of their emissions, Scope 1, 2, and 3. The latter one is the most challenging to report, yet the most important one.
You also want to see that the company sets ambitious emission reduction targets and offers a transparent, clear roadmap on how they’re going to achieve those targets.
Dig in! It might be a boring thing to do, but if you want your investments to be climate-friendly, it's worth learning the sustainability lingo.
2. Understand the sector
Not every sector is created equal. Some sectors are more emissions-intensive (e.g. agriculture, energy production, or transportation), while others emit less carbon in comparison. However, assessing investment products through their emission intensities only is not enough if you want to get the full picture. While it’s important to exclude some of the sectors from your investment decisions (e.g. mining, tobacco, guns, etc), it’s important to still consider those products that aim to accelerate the transition to net-zero within their own industry. Because truth be told, we will all need clothes. And electricity. And cars. So if all of a sudden eco-investors only start investing in vegan milk products, for example, this black-and-white approach can cause overlooking potential climate winners that are truly dedicated to transforming their industry and reducing emissions.
Orsted, a former fossil-fuel-heavy energy provider that is now considered the most sustainable company in the world, is a true example of how a climate transition is possible even by an oil and gas company.
So yes, some sectors are emissions-intensive. But do the companies within that sector have a realistic and ambitious plan on reducing emissions and meeting Paris goals? That’s the answer really worth looking for.
3. Research the right investment platforms
There’s a lot of work that goes into constructing a climate-friendly portfolio: the days of googling “top sustainable ETFs” are over if you want to find investment products that are greenwashing-free and aim to show real impact instead of a mere stamp of goodwill. Just like consumers have learned how to read the labels on the products they buy, investors need to learn how to read through the greenwashing and do their own research. If your research doesn’t match the company’s sustainable promise — here goes your answer.
Climate fintech is offering many exciting, innovative platforms built to deliver financial returns and a more sustainable future. Cooler Future is building an investing app focused on climate impact, for example. ecoligo lets users invest in clean solar energy in emerging markets. Carbon Collective is a robo-advisor that builds portfolios with a low climate impact. You can only expect more innovation to happen in the field of climate investing, and this could be the perfect time to research the platforms that can enable you to invest sustainably today, rather than tomorrow.
It’s your money after all — and, ultimately, your call. 💸🌱
Author’s bio: Olga is a Marketing Lead at Cooler Future, Europe’s first climate impact investing platform that allows anyone to invest sustainably and fight climate change at the same time. Get in touch with Olga on LinkedIn!