Heard of sustainable investing? Here’s our guide

Looking to make a difference with your investments, or simply want to diversify your portfolio? Sustainable investing could be the right fit for your long-term goals. Here’s how it may help build your financial future.

What is sustainable investing?

Also known as socially responsible investing, sustainable investing is a strategy that balances the potential returns on your investment against the broader impact of companies on society and the environment.

In other words, it’s about investing in companies that are committed to sustainable practices – whether that’s reducing their carbon emissions, promoting diversity and inclusion in the workplace, or practicing robust corporate governance.

This means sustainable investing is not limited to investing in companies in the sustainability sector that offer sustainable products or services. Instead, it includes a great variety of businesses and industries, all of which are looking to make a positive impact in many different ways.

The rise of sustainable investing

Sustainable investing has come a long way in recent years. Why? Because retail investors and expert traders alike are recognising the importance of aligning their investments with their values.

Indeed, a report from Morgan Stanley’s Institute for Sustainable Investing found that nearly four out of five investors (79%) and a whopping 99% of Millennial investors say they are interested in sustainable investing.

What’s more, according to the Schroders Institutional Investors Study 2022, almost half (48%) of Australians investors favoured companies working toward making positive environmental and social impacts. That’s a 21% increase to the year before.

Why sustainable investing might appeal to you

Investing sustainably is a way for Australians to make a positive impact on the wider world while growing their investment portfolio. It’s a way contribute to a brighter, more sustainable future for everyone.

So far, the proof appears to be in the pudding. Many companies in the sector, like Wesfarmers or Origin Energy have already demonstrated strong financial performance and resilience – despite ambitious sustainability targets.

How to research “sustainable stocks”

As with any new investment decision, research into each relevant sector is a necessity prior to investing. For sustainable stocks in particular, there are three main aspects to consider:

Environmental impact

Social initiatives

Governance practices

Also known as ESG, these three factors will give you a better understanding of the company’s commitment to sustainable practices. You can find this information in the company’s annual reports, sustainability announcements, and other corporate social responsibility (CSR) statements. There are also online tools that analyse and rank listed companies based on their ESG commitments.

Risks of sustainable investing

As with any investment, sustainable investing is not without risks. Having sustainable practices does not guarantee positive shareholder returns. Further, the valuation of these stocks can also be susceptible to market sentiment and variability of investor demand – in other words, they may face volatile price fluctuations.You should also be aware that some companies make claims about the extent of their environmental commitments. This can include how environmentally friendly, sustainable or ethical their practices or products are. The Australian Securities & Investments Commission (ASIC) details what you should look out for in particular, for example, in a company’s Product Disclosure Statement (PDS).

Sustainable investing isn’t just about growing your wealth – it's also about supporting companies that strive to make a positive impact on the environment.

By factoring in the broader implications of your investment decisions, and aligning them with your personal values, you can contribute to a more sustainable future while growing your investment portfolio. Get started with CommSec Pocket today.