Definition according to the European Union
As for an organic label, the accurate definition of sustainability vary from one country to another. In this article, we focus on the EU definition of sustainable investment.
According to the European Union, an investment is sustainable if it meets one or more of the following three criteria:
- An investment that meets certain environmental, social and governance criteria (so-called “ESG criteria”).
- An investment that meets the criteria in point 1, and also pursues one of the six objectives below (the so-called “European Taxonomy”): Climate change mitigation, Climate change adaptation, Protection of water and marine resources, Transition to a circular economy, Pollution prevention and control, Protection and restoration of biodiversity and ecosystems
- An investment with documented major negative social or environmental impacts. For example, this could be a company that will report on gender pay inequality or carbon emissions.
How to invest in a sustainable product?
Most financial products are being classified according to this European standard (real estate, commodities, funds, etc.). In the future, financial institutions will therefore recommend more and more sustainable products.
Advantages and disadvantages of sustainable investment
- Impact: sustainable investment allows you to have a positive social or environmental impact on the real world.
- Risk: sustainable investments are not guaranteed. It is possible to lose a portion or the totality of the initial investment.
- Diversification: the range of sustainable products is growing rapidly but is still more limited than non-sustainable products. Investing exclusively in sustainable products can therefore affect the diversification of your portfolio.