Our Guide to Sustainable Finance (2024)
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Discover the methodologyLately, the topic of sustainable finance has been making the news rounds. It’s a topic of discussion by the World Bank and the European Union as well as throughout Canada.
The Canadian Government is planning to transition to a Net Zero emissions economy by 2050 — investing heavily in infrastructure and projects that will reduce Canada’s carbon footprint to sustainable levels. With all this going on, is it worth asking if investing in sustainable finance is viable?
With all this recent focus on sustainable finance, we are going to explore what sustainable finance is and how you can invest in it.
What is sustainable finance?
Sustainable finance is the concept of investing in businesses and resources that are focused on green energy, business, infrastructure and products which are beneficial to the environment. The topic is often associated with the discussion of climate change and plans to invest in renewable energy such as wind, solar, nuclear and hydroelectric power.
Additionally, it can also focus on people as well as the environment. Focusing on investing that helps companies and causes with a social benefit can also be considered a type of sustainable finance.
In short, the idea is to invest in ways that benefit all of humankind and make a return on your investment while doing so. While with all forms of investing, there is no guarantee of a hefty return on investment, the growth of green energy in the past decade is an indication that the industry is growing!
Which institutions work on sustainable finance in Canada?
Currently, there are several Canadian financial institutions, universities, government agencies and public-private partnerships working towards sustainable finance. The Sustainable Finance Action Council (SFAC) is a state-sponsored org that attempts to coordinate and build consensus for sustainable finance in Canada. A partial list of financial institutions from the SFAC includes.
- PSP Investments
- Royal Bank of Canada
- Scotiabank
- Sun Life
- TD Bank Group
These are just a small sample of a larger group of NGOs, pension plans and financial institutions focusing on sustainable finance. There are also several platforms which allow you to put your money into a sustainable investment. Scotiabank, for example, is promoting its sustainable finance.
Are there platforms for sustainable investment?
Yes! As discussions of global warming increase, there is a greater focus than ever before on developing green energy and transforming existing industries. If you wanted to invest in sustainable projects, there are several finance platforms that you can invest in sustainable finance. Among these are:
- Wealthsimple
- QTrade
- Questrade
- Avatrade
- Fusion Markets
While all of these are international platforms, there are certainly others as well focusing on or at least offering sustainable financial investments.
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Why is sustainable finance important?
You don’t need to hear the latest climate news or read a UN report to feel the effects of climate change. Hotter summers and milder winters are proof enough of the effects of the release of CO2 into the planet’s atmosphere.
With global warming accelerating, it's important to invest in projects that either reduce reliance on energy resources that emit CO2 or focus on other technologies and infrastructure that focus on building a sustainable future and eventually reverse climate change.
What are the pros and cons of sustainable finance?
There are many reasons to look at sustainable finance as a way of trying to grow your means of income while at the same time investing in projects that could be considered good for the environment. That being said, sustainable investment can have some downsides, a brief list below helps explain why.
Pros
- Investment can help save the planet
- Investing in green energy such as solar power may become a lucrative financial investment
- Help greenlight several much-needed environmental projects
Cons
- Some attempts at sustainable finance can be considered “greenwashing” - the market-speak term for pretending to help the environment.
- Some of the companies or resources may not be as profitable as traditional types of investment.
At this point, it might be good to explore the topic of “greenwashing”. Greenwashing is the concept of companies marketing their environmental credentials, while in practice not really being as environmentally friendly as they claim. In some cases, they may even be actively harming the environment. Some projects that may advertise themselves as sustainable finance may just be greenwashing.
Due diligence on the part of the investor is necessary to avoid this.
One way to ensure that the company sincerely commits to sustainable finance is to look at what’s called an ESG. We will discuss ESGs and something called an SRI further below. but in short, an ESG is an analytical way a company attempts to meet its environmental objectives. Using this can help an investor avoid greenwashing or less-than-effective environmental projects.
How to invest in sustainable finance online?
There are many online brokers that can help you invest in sustainable finance. Investment platforms such as Avatrade, Wealthsimple and Qtrade offer many options to invest in sustainable finance in Canada.
Many platforms offer sustainable ETFs and mutual funds with a focus on ESG factors. These mechanisms allow investors to safely diversify their portfolios while investing sustainably. Investors can also invest directly in companies by purchasing stocks.
Expert advice
Don't buy stocks in a company just because it is more advertises itself as more eco-friendly than the competition. Investing in a single asset like a stock is more volatile than buying diversified mutual funds and ETFs. Pay attention to the company's past performance, leadership, industry trends and debt-to-equity ratio, just as you would with any stock.
Need some help finding the right online broker? Compare their offers now.
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What kind of performance can I get from socially responsible investing?
The performance of socially responsible or sustainable investing will vary. However, one key to this type of investing is investing in renewable energy.
Renewable energy resources such as wind, solar and hydroelectric have grown exponentially over the past decade. Moreso, with government-sponsored legislation such as the European Union’s Green New Deal or a similar bill passed last year in the US — there will be more investment and profitability in sectors such as green energy, carbon capture and green infrastructure. The United States also passed a large bill to invest in renewable energy technology and infrastructure which guarantees plenty of support for alternative energies. Canada meanwhile is also pushing to shift away from fossil fuels, albeit slowly.
What this means is that socially responsible investing, i.e. investing in companies, technology and resources that would help move society to a less exploitative form of resource extraction, is likely to expand with so much financial backing from governments across the globe.
What are ESG criteria and SRI?
If you are new to investing with a conscience, these terms might be new to you, but they are easy to understand.
For example
- ESG stands for Environmental Social Governance Investing.
- SRI stands for Socially Responsible Investment.
There are some key differences between an ESG and an SRI to keep in mind. An ESG is a metric of a company’s environmental, social and governance performance with an emphasis on real data while an SRI is a subjective measure used by an investor to analyze the social responsibility of an organization.
That being said, a company having a good ESG or an SRI does not automatically make it sustainable. Wealthsimple recently removed their previous green indexes because they were not effective enough at promoting sustainable investing and created new investments that removed the top 25% of carbon emitters.
The main takeaway from this is that ESGs and SRIs, while a good starting point, is not where the buck stops. Investors have to do their own research into the companies and index funds which champion sustainable finance to see if it holds up to scrutiny.
What is the difference between sustainable finance and socially responsible investing?
There is a lot of overlay between sustainable finance and socially responsible investing. Socially responsible investing is the concept of investing in projects that benefit the broader society and help historically marginalized social groups and minorities.
Socially responsible investment, much like sustainable finance, is generally focused on long-term investing. If you are an investor who focuses on short-term investments but wants to move towards a longer-term strategy socially responsible investing may be worth considering.
Good to know
Sustainable finance and socially responsible investing are part of a broader push to invest ethically.
Is sustainable finance worth investing in?
Yes. Sustainable Finance is an ethical form of financial investment in a cleaner, better world while also investing in companies, technology and infrastructure that are more than likely going to financially be very profitable in the future.
Sustainable finance is a compelling way of investing ethically and diversifying your portfolio.
Yes, there are some index funds and other investment funds that focus heavily on green energy that would be compatible with sustainable finance. For example, some companies such as Wealthsimple have created new indexes which focus on sustainable and socially responsible investing. You could easily diversify your portfolio by exploring these indexes for future investments in your account.
Does sustainable finance training exist?
There are many investment platforms such as Wealthsimple, Qtrade, Questrade and others which have plenty of informative material on sustainable and socially responsible finance. This is a good starting point if you want to explore this topic and get a crash course in using ESG factors in your investing decisions.
For people looking to go beyond an online course, several Canadian universities now offering master’s programs in sustainable Finance. Queens University recently created the Institute of Sustainable Finance to meet educational and financial needs. If you are looking to explore this topic further, this might be the best option if you wanted to make a career in finance with an ethical mindset. It might also help you sift through the wheat from the chaff when avoiding greenwashing.
What kinds of accounts can I use for investing in sustainable finance?
You can invest in sustainable finance or socially responsible investing in practically any kind of account, be it a brokerage, TFSA or RRSP account. If you are looking at starting an account with an investment platform, some good options to consider are Canada's big five banks and the brokerages Qtrade, Wealthsimple, Questrade, Avatrade and Fusion Markets.
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