Sustainable stocks: How to invest green

Sustainable and environmentally conscious thinking is reaching more and more areas of our lives, and that's a good thing! Today, we want to introduce you to a category that might not be the first thing you think of when deciding to adopt a sustainable lifestyle: sustainable stocks !

First and foremost, however, we ask ourselves how stocks can even be sustainable . When you imagine the classic image of a hectic stock market full of businessmen in suits, anxiously waiting for the next best investment, it's hard at first to reconcile this with our idea of ​​sustainability . However, the trend is increasingly moving toward companies and private individuals wanting to do good with their money and support the preservation of a healthy environment. In 2020 alone, private investors invested around €39.8 million in sustainable funds and mandates—almost double the amount of the previous year.

But let's start from the beginning. Sustainability , in a nutshell, means meeting our own needs without compromising the needs of future generations. Sustainability encompasses ecological, economic, social, and societal dimensions. We have a more detailed definition for you in another blog post .

This principle also applies to investing in sustainable stocks. Specific examples of sustainable stocks include investments in environmentally friendly sectors, such as renewable energies, innovative engine technology, or recycling. However, there are currently no clear and uniform regulations regarding the characteristics an investment must have to be considered sustainable. However, this is set to change, and the EU intends to establish a clear minimum standard in the coming years.

As already mentioned, there is currently no uniform classification of which stocks fall under the category of sustainability, and whether an investment is considered sustainable or not is often a matter of personal preference. Nevertheless, there are at least a few distinctions from conventional investments.

In theory, shares of companies that actively destroy the environment or violate human rights are clearly not considered sustainable investments. However, as we know, in reality, it is often not entirely clear or known to consumers whether a company consistently adheres to sustainability principles. In general, however, sustainable shares should come from companies that meet ESG criteria . The E stands for "Environment" – the company's environmental friendliness, which includes, for example, production, emissions, and the use of natural resources. S stands for "Social" – social responsibility, such as the protection of human and labor rights, fair working conditions, and high standards of occupational safety. The G stands for "Governance," meaning good corporate management, which includes pursuing ethical corporate principles, avoiding corruption and bribery, and having a transparent compensation policy. According to these criteria, shares that do not belong to companies in the aforementioned sectors can also be sustainable if the company pursues sustainable approaches.

However, it should also be noted that the term "ESG" is not yet legally protected , and theoretically any fund manager can use this label for their own purposes. Therefore, stocks bearing the "ESG" label may unfortunately include companies from critical sectors, such as the oil industry.

In addition, there is also the so-called best-in-class approach . This approach involves including shares of companies in a fund that are only marginally sustainable but still perform better than the rest of their sector.

That's why it's definitely worth taking a closer look at your stocks or funds and critically examining the companies they contain.

When choosing stocks, funds, or ETFs, always ask yourself whether you are familiar with the company and understand its business model . Also, examine the traditional aspects of sustainable alternatives and consider the company's image in your decision. You should also consider the type of company itself. Is it a large public company or a small startup? Startups offer the opportunity for explosive growth. However, they also carry a higher risk.

As you may already notice, it's not that easy for private investors to identify sustainable stocks, and there are limitless investment options. A good starting point, however, are sustainability indices such as the DAX50ESG or the MSCI World Socially Responsible Index (SRI) . The DAX50ESG includes the 50 largest and most liquid companies based on ESG criteria in the German stock market and categorically excludes companies that sell weapons, tobacco, nuclear energy, thermal coal, or military equipment. The MSCI World Socially Responsible Index (SRI), on the other hand, includes approximately 400 companies worldwide with the highest ESG rankings.

Another sustainability index you can examine, which adheres to even stricter criteria, is the Nature Stock Index (NAI). This includes 30 international companies that are consistently reviewed according to specific criteria. Furthermore, the NAI has been considered THE go-to resource for green investments since 1997.

In general, sustainable investment products do not necessarily carry a higher risk and the return does not necessarily have to be worse, but the following also applies here: the more specialized the sector , the higher the risk and the lower the return.

Especially for private investors who aren't yet active on the stock market, it makes sense to invest in sustainable equity funds or ETFs to diversify risk. Many sustainable funds or ETFs are already structured to promise a portfolio of green and socially responsible stocks. However, it's worth taking a closer look at the individual stocks. Often, a few problematic companies sneak into funds labeled as sustainable.

As you can see, it's not all that easy to keep track of everything and make the seemingly right decision. Fortunately, others have already taken the trouble, and there are numerous rankings to help you make your decision.

If you're interested in an equity fund, you should check out the 2020 Stiftung Warentest ranking. It examined 156 sustainability funds in more detail and reached the following conclusion:

1. Ökovision Classic
2. Superior 6 Global Challenges
3. GLS Bank equity fund
4. Steyler Fair Invest
5. Warburg Invest Global Challenges

Also new since 2021 is the ESG Global All Cap ETF, which has a strong focus on sustainability. It contains a wide range of stocks from global companies to diversify risk as much as possible.

Also recommended are ETFs from UBS Bank, which contain stocks included in the MSCI World SRI Index.

According to experts, these are the best sustainable stocks you can invest in: Microsoft, Tesla , and Nvidia . Of course, there are also profitable stocks in companies that are actively committed to protecting the environment. We've listed them here for you:

• Renewable energies : SunPower Corporation, Xinjiang Goldwind Science Technology Co., Ltd., Nordex SE
• Electromobility : NIO, Xiaopeng Motors (Xpeng), Tesla
• Food : United Natural Foods, Inc., SunOpta, Inc., Sprouts Farmers Market, Inc.
• Finance : Ökoworld AG, Umweltbank AG, The Renewables Infrastructure Group

But aside from ethical considerations, does it even make sense to invest in sustainable stocks? In our opinion, absolutely! Companies that completely ignore sustainability and harm the environment will find it increasingly difficult to gain support in the future. From a political perspective, the introduction of punitive taxes , emissions caps, or bans could also make it increasingly difficult for some companies. Furthermore, several studies and analyses have now proven that, on average, sustainable bonds generate returns just as good as those of conventional stocks. Nevertheless, a certain degree of caution is always required, and the price can, of course, still fluctuate constantly.

Ultimately, it's entirely up to you what you want to do with your money. Keep in mind, however, that buying shares doesn't actually result in money flowing into the company! That only happens when you sell the first shares after the company goes public, or when you support the company by purchasing its products or taking out a loan . Another investment option is green bonds , which allow you to specifically invest in environmental projects.