Have you ever wondered what impact your investment dollars can have beyond your own financial goals? Investing is about more than growing wealth. For some investors, it is also an opportunity to support companies and businesses that consider environmental, social and governance (ESG) factors in how they operate.
Sustainable investing brings these considerations into the investment decision-making process. Depending on the investment, this can mean considering factors such as environmental impact, workplace practices, corporate governance, diversity, resource use and other sustainability-related characteristics alongside traditional financial considerations. Sustainable investing isn't simply about choosing investments that sound environmentally friendly. It requires understanding how an investment is structured, what criteria are used to select investments, the potential risks and returns, and whether the investment aligns with your financial goals and personal values.
What is sustainable investing?
Sustainable investing is an approach to investing that considers environmental, social and governance (ESG) factors alongside traditional financial information.
ESG factors can include:
- Environmental: Climate-related risks, energy use, emissions, resource management, pollution and other environmental considerations.
- Social: Employee practices, human rights, community relationships, customer considerations and diversity.
- Governance: Corporate leadership, board composition, business ethics, transparency and shareholder rights.
There are several approaches to sustainable investing. Some investments may focus on companies with stronger ESG characteristics, while others may specifically target environmental or social themes. It's important to remember that the term "sustainable investment" can mean different things depending on the investment product and the methodology used to select its underlying investments. Always review the product documentation to understand exactly what you are investing in.
Why sustainable investing can be part of a diversified portfolio
Sustainable investing does not have to mean choosing between your financial goals and your personal values. Depending on the investment product, incorporating ESG considerations can provide another way to diversify a portfolio across companies, industries, regions or investment themes. Diversification can help reduce the impact that the performance of any single investment has on your overall portfolio. However, diversification does not eliminate investment risk or guarantee a return.
It's also important not to assume that an ESG-focused investment will automatically outperform a traditional investment. Investment performance depends on many factors, including market conditions, the investments selected, fees, the investment structure and the time period being considered. The goal should be to find investments that fit your risk tolerance, investment objectives, time horizon and overall financial plan.
How to get started with sustainable investing
If you're interested in sustainable investing, start by identifying what matters most to you and then learn how different investment products address those priorities.
1. Define what sustainability means to you
Sustainable investing can mean different things to different people.
You may be particularly interested in:
- Renewable energy
- Environmental sustainability
- Clean technology
- Water and resource management
- Diversity and inclusion
- Responsible corporate governance
- Social responsibility
- Companies addressing specific environmental or social challenges
Identifying your priorities can help you determine what types of investments you want to research.
2. Understand the investment strategy
Don't rely solely on a fund or investment's name or marketing materials.
Review the investment's documentation to understand:
- What companies or securities are included
- How investments are selected
- Which ESG factors are considered
- Whether specific industries are excluded
- How the investment is diversified
- How returns are calculated
- What fees or costs apply
- What risks are involved
This research can help you determine whether an investment's approach actually aligns with your expectations.
3. Consider risk and return
Sustainable investing is still investing, which means risk is an important consideration. An investment's sustainability characteristics do not guarantee that it will increase in value or outperform other investments. Some sustainable investments may also be concentrated in particular industries, regions or investment themes, which can affect their risk and volatility. Before investing, consider whether the investment is appropriate for your financial situation and investment objectives.
4. Look beyond past performance
Past performance can provide useful information, but it should not be treated as a guarantee of future results. When evaluating an investment, consider the complete picture: its strategy, underlying investments, risk level, fees, term, liquidity and potential returns.
Sustainable investment options at YNCU
YNCU offers investment solutions that may appeal to members who want to incorporate environmental or social considerations into their investment strategy. One option is the Green Neighbourhoods Market-Linked Guaranteed Investment, which provides exposure to a group of companies selected with environmental considerations in mind, including companies operating in areas such as renewable energy. YNCU's current information shows that this product is a market-linked GIC with terms and return characteristics that can vary over time.
Market-linked guaranteed investments differ from conventional fixed-rate GICs. The return is linked to the performance of underlying securities rather than being determined entirely by a fixed interest rate. The original investment is protected at maturity according to the product's terms, but the variable return can be different from that of a conventional GIC and may be limited or nil depending on the product and market performance. YNCU also offers other investment solutions that can help members build a diversified portfolio. Investment options and product terms can change, so review the current product information before making an investment decision.
Interested in learning more? Visit YNCU's current investment options or speak with a YNCU investment professional to determine which solutions may be appropriate for your goals.
What is a market-linked GIC?
A market-linked GIC, also called a market-linked guaranteed investment (MLGI), combines characteristics of a GIC with potential exposure to market performance. With this type of investment, your return is linked to the performance of specified underlying securities or a benchmark. Unlike a conventional fixed-rate GIC, the final return may not be known until maturity.
Market-linked GICs can offer:
- Protection of the original investment at maturity, subject to the product's terms
- Potential for a return linked to market performance
- Exposure to a diversified group of companies or securities
- Different investment themes or strategies
However, they also have important limitations. A market-linked GIC does not necessarily provide a higher return than a conventional GIC, and the return can be lower than expected or potentially nil depending on the product's structure and market performance. Always read the applicable investment agreement and product disclosure before investing.
Sustainable investing and diversification
One of the potential benefits of sustainable investment products is the opportunity to invest across multiple companies, sectors or regions rather than relying on a single company or investment. For example, a market-linked investment may provide exposure to a basket of companies operating across several economic sectors and countries. This can provide diversification within that particular investment. However, one sustainable investment should not automatically be considered a diversified portfolio.
A well-rounded investment strategy should consider your complete financial picture, including your other investments, savings, retirement accounts, cash needs, risk tolerance and investment timeline.
Questions to ask before choosing a sustainable investment
Before investing, consider asking:
- What does "sustainable" mean for this investment?
- Which ESG criteria are used to select investments?
- Which companies or securities are included?
- How diversified is the investment?
- What are the potential risks and returns?
- Is my original investment protected, and when?
- How is the return calculated?
- Can I access my money before maturity?
- What fees or costs apply?
- Does this investment fit my financial goals and risk tolerance?
These questions can help you move beyond a product's label and understand what you are actually purchasing.
Sustainable investing is about more than doing good
Sustainable investing can be a way to incorporate environmental, social and governance considerations into your financial plan while pursuing your long-term investment objectives. But sustainable investing isn't a guarantee of better performance, and no investment strategy is right for everyone.
The best approach is to understand what you are investing in, evaluate the risks and potential returns, diversify appropriately, and make investment decisions based on your individual goals and financial circumstances. If you're considering sustainable investing, a YNCU advisor can help you explore your options and determine how they may fit into your broader investment strategy.
The bottom line
Sustainable investing gives investors another way to consider financial goals and ESG factors together.
Whether your priority is environmental sustainability, social responsibility, corporate governance or simply building a more diversified investment portfolio, the key is to understand the investment before you commit your money. Research the investment strategy, review the product documentation, consider the risks, and make sure the investment aligns with your overall financial plan.
For more financial literacy information, continue to visit our magazine as a financial resource. If you're ready to discuss your investment goals, reach out to a YNCU advisor. Follow us on Instagram, Facebook, and LinkedIn for more honest money talk tips.
