16 December 2021 11:15:37

Financial adviser explains the real risks of investing in sustainability

With sustainability and climate change a contentious issue, many find themselves wondering whether the numbers stack up on sustainable investing.

According to the Low Institute, 60 per cent of Australians believe that "global warming is a serious and pressing problem".

So unsurprisingly, sustainable investing has become a huge – and still growing – market. In fact, it would be surprising to discover your super fund lacked some form of sustainability option.

However, there is no one-size-fits-all approach to investing. Nobody but you can decide whether sustainable investing is worth investing in. But consider some of these factors while making that decision.

Understanding ‘sustainable’ before investing

What does ‘sustainable’ really mean? How is it determined and measured?

Many in the finance world talk about ESG investing – environmental, social, and governance. It means scrutinising not just the environmental sustainability of a company or asset, but its leadership and relations with people too – supply chain, workforce, ownership structure, and the wider community. Even its tax contributions (or lack of).

Fund managers also have different criteria for how they assess sustainability. Some may be anti firearms, pro diversity or against tobacco and/or alcohol.

Consider where your values lie, how potential investments align with those values and how their progress is measured.

Finding authenticity in being green

Determine whether an investment’s sustainability credentials are genuine. For example, some companies spruik their use of degradable plastics. But unlike biodegradable plastics, degradable ones generally only break down into microplastics, leaving tiny plastic particles that seep into waterways, oceans, wildlife – and even our own food chain.

Similarly, some boast about being an ethical employer, but sell products made using labour exploitation.

Think about your real-world impact too. Refraining from investing in certain companies doesn’t stop their environmental impacts.

Being an authentic sustainable investor means investing in companies or initiatives that deliver meaningful solutions. Alternatively, you could generate profits from the wider market to direct into sustainable ventures.

Good costs vs bad costs

Many people have sacrificed investment earnings to "do the right thing". But there is much more choice nowadays and so the two are not mutually exclusive.

Similarly costs for sustainable assets and practices have come down, making that less of a deterrent.

Look for investments that do good and deliver good returns. This has as much to do with the associated management costs or investment fund’s fees as the asset itself.

Flow-on effects out of your control

Australia and its resources-dependent economy attracted criticism at the recent COP26 summit, while other countries look to invest more heavily in sustainability and renewable energy.

Is it ethical and sustainable, for example, to forgo Australian investments in favour of more sustainable-focused economies, while entire Australian towns face extinction if their local mine were to cease operations without an alternative source of employment for locals?

Consider where in the world you invest and how that impacts the communities ultimately benefiting from or denied that funding.

Realities of the investment cycle

Investments that contribute to sustainable causes are one thing. But are they viable and capable of sustaining returns to investors?

There is a risk to innovation – ideas may contribute towards reducing our adverse impacts on people and planet, but never deliver a cent for those who financed them. Conversely, though, sustainable trailblazers receive more attention, making it easier to attract investment. How do established companies attract the investment needed to keep pace with this change?

Finding sustainability that works for you

Above all, look at what is sustainable for you and your particular circumstances.

What is your own business doing around sustainability? How viable is its business model around its ESG impacts – and hence the viability of your own source of income?

When it comes to sustainable investing, perhaps that old saying about not seeing the wood for the trees has never been more apt.

Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet: Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce: Your Survive and Thrive Financial Guide.