Investing your assets profitably, while at the same time having a positive impact on society and the environment, is something that ever more investors are looking for – from private individuals to family offices to organisations and institutions. Demand for sustainable investments has already seen strong growth in recent years, and with the current concerns over climate change, the situation is becoming increasingly dynamic.
According to the latest market report from the German Forum for Sustainable Investments (FNG), sustainable investing has now become mainstream. The total volume of sustainable investments reached 219.1 billion euros at the end of 2018, a new all-time high for Germany. Compared with the previous year, this was an increase of 28.2 percent. Globally, investments in sustainable funds and projects are also steadily increasing.
But what does “investing sustainably” actually mean?
Even though legal frameworks such as the EU Action Plan: Financing Sustainable Growth are having a positive impact on the continuing development of sustainable investments, when it comes to transparency and quality we are today still a long way from an unambiguous definition of what sustainable or responsible investing is.
Currently, what sustainability actually means and what the underlying criteria and strategies are, depends very much on the various providers.
In this article we intend to shed some light on this question and take a closer look at the most important aspects that investors should be considering if they want to not only make a financial return on their investments, but also achieve a social return as well.
We will be examining the following:
There is no uniform definition for the term “sustainability”. An investor should therefore look very carefully at what the various providers of sustainable investments mean by “sustainable” and which criteria they apply.
An important point of reference for many people is the definition of the term “sustainable development”, which was coined in 1987 in the United Nations Brundtland Report. It states that, on the one hand, sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” And that on the other hand, it is “a process of transformation in which the use of resources, the goal of investments, the direction of technological developments and institutional change harmonise with each other and increase the current and future potential to meet people’s needs and aspirations”.
To increase transparency and to help investors navigate their way around the range of sustainable investments on offer, various labels, certificates and evaluation criteria have now become established. We will be looking at them in the next section.
Details on how Soy defines sustainability and how we actually go about implementing it in our projects can be found here.
How sustainable is an investment and which criteria does the investment provider apply? To help investors find their way around, a range of labels, certificates, criteria and evaluation systems have now become well established. Here we present the most important ones.
ESG criteria
The so-called ESG criteria have established themselves in the financial sector as a standard for differentiating between sustainable investments and the more conventional types. The abbreviation stands for Environmental, Social and Governance. By integrating the ESG criteria, sustainable investments can be evaluated and administered.
United Nations: 17 sustainable development goals
The United Nations’ 17 sustainable development goals, SDG, also offer a basis for assessing the sustainability of companies or investments. For investors evaluating their portfolios, the 17 SDGs are particularly useful with regards to so-called Impact Investing.
The 17 goals comprise:
The 10 principles of the UN Global Compact
The UN Global Compact is the world’s largest initiative for responsible corporate leadership. Its 10 principles, taken together with the SDGs follow a vision of an inclusive and sustainable global economy, and also provide a useful standard for assessing sustainable investments.
The 10 principles cover the areas
FNG label
With its FNG label, the German Forum for Sustainable Investing aims to help investors by providing a quality standard for sustainable investment funds. Funds awarded this label must comply with certain minimum standards with regards to transparency, respect for workers’ rights and human rights, environmental protection and anti-corruption, as well as sustainability.
Sustainability funds in a variety of sectors that are particularly outstanding are awarded the FNG label, which uses a graduated model with up to three stars.
IRIS+
For the investment strategy Impact Investing, which we will take a closer look at below, the Global Impact Investing Network (GIIN) developed the rating systems IRIS and IRIS+. Its aim is to help investors to measure, manage and optimise the actual impact of their portfolios.
For sustainable investing, a range of different investment strategies have become established. In its latest brochure on entry-level sustainable investing, the FNG differentiates between the following strategies:
Criteria for Exclusion help ensure that, for example, companies that are not in alignment with the investor’s values are excluded from the investment portfolio. The most important exclusion criteria include, for example, arms trade, human rights violations, workers’ rights violations, gambling, pornography, atomic energy, environmental destruction etc.
The Best-in-Class approach means investing in the best in the sector. Initially, this applies to any sector, including ones that are controversial in terms of sustainability, such as the automotive industry. Within the sector, companies are then compared with each other according how they apply the ESG criteria.
Engagement is a strategy whereby the major investors and shareholders in a company are in direct communication on issues such as improving sustainability.
For example, anyone who has invested over a certain amount in our sustainable real estate projects is given co-determination and veto rights.
The ESG Integration strategy explicitly applies the ESG criteria for analysing and evaluating an investment.
Investors using the Impact Investing strategy pursue the twin goals of achieving a good rate of return on their investment and also having a positive impact on society and the environment. The German organisation Bundesinitiative Impact Investing defines the term as an “investment approach that goes beyond purely focusing on financial returns and risks. A positive social and/or ecological impact should, where possible, be direct, intended and verifiable. For us it is about a measurable positive outcome for society and/or the environment. According to this definition, impact investing goes further that the current ESG or SRI (socially responsible investing) approaches”.
Impact investing often involves investment funds that include in their portfolios young companies that are developing social innovations. In Germany, the funds that support such start-ups are mostly offered by investment companies like Bonventure or Ananda Impact Ventures. Impact investing is becoming gradually more important, both in Germany and globally.
Sustainable thematic funds are investments in specific areas, for example, renewable energy, green technologies, sustainable real estate, and education and social projects.
Now we come to the “how” of sustainable investing. From shares to banks to crowd-investing there is a full range of investment types for investors interested in sustainability.
Ecological and ethical banks differ from traditional banks in that - above all - the ecological and ethically meaningful use of funds plays a major role as an investment criterium, in addition to liquidity, security and returns.
Examples for alternative banks in Germany include
A full list of sustainable banks in Germany can be found here.
When it comes to sustainable shares and investment funds, investors can choose from a broad range of offers. The online portal ECOreporter offers a good overview of sustainable shares, subdivided into different sectors such as wind, solar, real estate and health, and evaluates these according to its own criteria.
A selection of sustainable investment funds can also be found on the Website. In German-speaking countries, the FNG label has become established as a quality label for sustainable funds. An annual list of outstanding funds is available, also as a download.
With crowd-investing, a large number of people, usually investing small amounts from between 50 euros to 10,000 euros, join together to support sustainable projects or start-ups. Investors receive a share of the profits after the investment term. This type of investment is usually a financial bond or subordinated loan.
Crowd-investing platforms in Germany include:
Investing in real estate projects with Soy
Soy also offers environmentally aware investors the opportunity to invest their capital in consistently sustainable real estate projects on Mallorca.
Because of the current market situation on Mallorca and in Spain in general, we can guarantee an exceptionally high rate of return that very clearly sets us apart from the returns usually on offer in Germany.
Investors who want to invest their money sustainably are never simply motivated by financial returns. Above all, they want to use their capital to make a contribution towards doing something for the good of the environment and society.
This is why you should take your time to come to a decision and start by asking yourself "why" before then looking at the various investment forms, strategies and providers.
At Soy, we love to ask questions when it comes to the development of our sustainable real estate projects. Many questions!
So, do not be afraid to also ask a lot of questions when investing your capital. What is important to you? What do you want to achieve? What impact should your investment have? Just ask! It is worth it.
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