Your guide to investing sustainably

In 2022, the European Commission (EC) decided to include specific gas and nuclear activities in its taxonomy, on the grounds that these technologies contribute, under certain circumstances, to the fight against climate change. As a result, investments in nuclear or gas-fired power stations that produce electricity are classified "sustainable". And the decision has aroused the ire of a number of NGOs, such as Greenpeace. They accuse the EC of greenwashing and are taking the decision to the European Court of Justice in 2023. The controversy over the EU Taxonomy illustrates how difficult it can be to agree on what is sustainable and what is not.

"There is no universal definition of sustainability," Professor Philipp Krüger, a responsible finance expert from the University of Geneva, said in an interview with us. Yili Wu, sustainable investing strategist at Global X ETFs, feels it should be up to investors to decide: "I believe it’s important for each investor to think for themselves about their sustainability and performance objectives." Here are a few strategies to guide you in your choices.

Choosing the companies in which you invest offers a definite advantage: you can be sure that all the companies in your portfolio align with your values, whatever they may be. For example, someone who is a climate change sceptic but very concerned about social issues might choose to buy shares in the French group Sodexo, which in early 2023 launched a common benefits standard for its 420,000 employees in 53 countries. All employees now have access to life insurance, parental leave and caregiver leave. Or, you can choose to invest in the biggest proponents of LG-BTQIA+ inclusion. This approach can even be economically profitable, according to the 2020 Credit Suisse study, "Diversity: The LGBT-350". It shows that the shares of companies that take the most action to promote the inclusion of LGBT+ people generally perform better. The bank came to that conclusion by looking at the performance of a portfolio of 350 LGBT-inclusive companies. Tech giants such as Apple, Microsoft, Amazon and Google topped the list.

Some funds and ETFs labelled as "green" or "sustainable" include companies active in oil, gas or nuclear power. But for many investors, that is unacceptable. What can you do? "Along with green ETFs, there are more specialised ETFs that let you invest in a specific sector, such as hydrogen or renewable energy ETFs," says Yili Wu, sustainable investing strategist at Global X ETFs. But this technique is not perfect either. For example, hydrogen ETFs include companies such as Air Liquide and Air Products. However, these groups mostly produce grey or blue hydrogen, which comes from fossil fuels.

The Global Impact Investing Network (GIIN) defines impact investing as "investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return". Unlike "sustainable" investments, which generally involve companies awarded high ESG ratings, impact investing aims to bring a measurable benefit to society. For example, Coca-Cola may be included in "sustainable" funds, but not in impact funds. Tesla, Zoom Video Communications, Moderna and Impossible Foods are frequently cited as examples of success in terms of impact, as they have produced both financial gains for their investors and made a positive contribution to social or environmental issues. Impact investing first started out as a way of backing startups that aimed to achieve a positive impact on the world. Today, there are many impact ETFs and impact funds.

The best-in-class approach consists of investing in companies that lead their sector in implementing their ESG criteria. In other words, these companies have been awarded the highest ratings from agencies such as MSCI and Refinitiv. For example, Refinitiv’s ranking lists the three most socially responsible companies in the world as IBM (US), SAP (Germany) and Tata Consultancy Services (India). The Swiss company with the highest ranking is Roche, coming in ninth. Best in class can also be applied with exchange-traded funds (ETFs) or funds that include the companies with the top scores across all sectors. Several studies show that best-in-class companies slightly outperform the market. 

"Do you want your investment to have an immediate impact or are you looking at the long term?" asks Luke Ward, investment manager with the Global Discovery Team at Baillie Gifford. He believes that, while investing in renewable energies (solar and wind power) may have a small impact in the short term, investing in disruptive technologies could truly revolutionise things if they eventually gain traction. "For these technologies to be adopted, they have to be better and cheaper," Ward adds. "Look at nuclear power. Over time, this technology has become increasingly expensive. One solution could be to use small modular reactors (SMRs). By standardising components and building dozens or hundreds of units, the companies that develop SMRs could drastically reduce the cost of nuclear energy and therefore have a major impact on decarbonisation." One of the companies developing SMRs is NuScale Power (see Swissquote Magazine’s May 2022 issue). Other technologies, such as solid-state batteries, which Toyota plans to mass-produce between 2027 and 2028, or nuclear fusion, namely with Shine Technologies, could also have a genuine impact in the medium to long term.