How To Invest The Green Way (The Right Way)

In recent weeks, both Singapore and Malaysia had experienced a transboundary haze that has enveloped our cities, caused by the forest fires occurring in Indonesia. As the haze reached alarming levels, we turned our attention to the perpetrators. This drew attention to several corporations allegedly involved in using slash-and-burn agricultural practices that contributed to the air pollution.

You might ask, "What's that got to do with me?" While our individual contributions may seem small, the money you invest in may have been used to fund these businesses, who are responsible for such environmentally harmful practices without you even realising it.

We are all aware about the importance of investing, and naturally we are more likely to look for investments that gives us better returns, while considering our risk tolerance and how we diversify our portfolio. But is there more to investing than just these factors?

What is sustainable investing?

The words "sustainability" and "ESG", also known as environmental, social, and governance, has been thrown around for decades, and it has become a moving needle for many corporations.

In Malaysia and Singapore, public listed companies are mandated to disclose their ESG and sustainability reports under the respective stock exchanges' (Bursa Malaysia and Singapore Exchange) reporting requirements. The regulations were implemented, so companies can inform their stakeholders about the company's environmental, social, and governance risks. These factors will in turn affect long-term profitability and investor confidence, as there are investors who seek long term value and reduced risk exposure.

For instance, a manufacturing company that relies heavily on water may face higher costs or production disruptions if water suddenly becomes scarce.

A company that adheres to ESG standards may appear more attractive to investors. However, we need to know when to strike a balance between investing in companies with strong ESG practices and those with proven growth potential.

To understand where to draw the line, we must first explore the different dimensions of sustainable investing, which is an umbrella term for various investment strategies that share overlapping objectives and values.

ESG investing

This strategy integrates the three risks of ESG into an investor's financial analysis. Other than just making an investment decision based on financial performance, the investor will also consider the Environmental, Social, and Governance risks a company is exposed to.

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Environmental: How a company affects the environment. For example, carbon emissions, type of energy used, and waste management.

Social: How does a company treat its employees. For example, employee welfare, labour practices, and human rights.

Governance: How a company is being managed. For example, business ethics, leadership accountability, and shareholders transparency.

Green investing

It is a specialised subset of sustainable investing in which investors focus specifically on investments that deliver environmental benefits, such as renewable energy, clean technology and carbon emission reduction.

There are various ETFs and bonds that support this investment strategy, with the iShares Global Clean Energy ETF (XCLN) being one example. The ETF focuses on companies in the clean energy sector, offering investors exposure to the industry's growth potential while aiming to generate returns.

Impact investing

Impact investing focuses more on generating measurable social or environmental impact alongside a financial return.

For instance, you can fund a venture that turns plastic waste from landfills into affordable building materials for rural homes and schools. This creates multiple impactful benefits, such as reducing plastic waste, making low-cost infrastructure more accessible, and creating job opportunities for local waste collectors.

However, not every impact investment can generate the same returns as traditional markets. Some would prioritise measurable impact and accept lower returns, while others aim for competitive returns with similar risk.

How to invest the green way?

Define your values

We are all guided by our own beliefs and values that shape who we are today. Investing can work the same way, allowing you to incorporate what matters most to you into your portfolio.

Some may prioritise environmental sustainability by doing little to no harm through their investments. Some would value social justice by only investing in companies that uphold employee and consumer rights. Meanwhile, some investors may prioritise financial returns over ethical or environmental considerations, and that is okay too. Ultimately, your investment decisions should be guided by your own research, financial goals and discretion.

Start small and observe

You don't have to commit all your capital to a single investment strategy. Instead of placing all bets into one green stock, ETF or fund, you can start by allocating a small portion for sustainable investments and monitor their financial performance over time.

Once you are more confident with the risks and returns, you can choose to increase its allocation or pull out if the fund is not performing well.

Balance sustainability with financial performance

Investing starts with a financial goal in mind, so our goals should always be our top priority. While some ESG stocks and ETFs have delivered promising returns over the years, their performance may still fall short of certain high-growth stocks' performances.

Since your financial goals should remain a top priority, you need to plan your portfolio based your required risk— the level of investment returns you need to achieve your financial targets. If reaching your goals requires higher returns, certain sustainable investments may not be suitable for your needs.

You can also look for company disclosures on their sustainability-related risks and energy efficiency. ESG frameworks such as IFRS Sustainability Disclosure Standards (ISSB) informs investors on how a company's environment, social or governance risk may affect its financial performance.