How to invest with a clear conscience

Global warming, pollution, child labor: In order not to invest in companies that promote such developments, you should take a look at sustainable ETFs. But there are very big differences.

Ever since Greta Thunberg and the Fridays for Future movement in Germany have been demonstrating regularly, awareness of the environment and climate protection has been present in many minds. Many investors are therefore wondering whether they can also invest their money in climate-friendly companies.

The clear answer is yes. The easiest and cheapest way is with so-called sustainable ETFs. This means exchange-traded index funds that exclude stocks from companies whose profits potentially harm the climate – for example oil companies.

Even more: depending on the criteria the index applies, you can invest your money with such an ETF not only in climate protection, but also in companies that have higher social standards. But what is a sustainable ETF anyway? And how sustainable are these ETFs really? An overview.

What is a sustainable ETF?

First of all, it has to be clarified what an ETF is. An ETF or index fund is a special fund. You can think of a fund as a basket into which investors deposit money. A manager usually invests this money: in stocks, commodities such as gold or in Real estate.

However, there is no fund manager with an ETF. Instead, a computer algorithm takes over the investment. To do this, it replicates a stock index like the Dax: If you invest in an ETF, you invest your money in practically all stocks in the index.

At this point, the investment is also interesting for people who value not only the return, but also the compatibility of their investment with the environment. Because there are also sustainable ETFs.

These are ETFs that track a stock index that contains sustainable companies. These can be companies that produce wind turbines or solar systems. However, these can also be companies that simply work a little more sustainably than the competition (see below).

Which ETFs are really sustainable?

That is the crucial question. Because so far there is no uniform definition. Fundamentally, investors try to identify an investment as “sustainable” if they have the so-called “ESG” criteria follows. The abbreviation “ESG” stands for “Environment, Social, Governance”.

This means: environmental and climate protection, social responsibility, i.e. outlawing child labor, and sustainable, transparent corporate governance. This can be expressed, for example, in employee participation. However, there are some differences in the implementation of these sustainability criteria, which can best be seen in the various stock indices.

What sustainable indices are there?

The sustainable indices often build on the conventional stock indices. For example, there is the MSCI World Socially Responsible Index (SRI): It is based on the MSCI World Index, which contains more than 1,600 companies worldwide and shows their performance.

The MSCI World SRI on the other hand, many of these companies are excluded from the outset – and only contain just under 400 companies. For example, corporations that make their money from tobacco, alcohol or weapons fly out. Because these transactions violate the ESG criteria. Stock exchange companies that the index tracks are, for example, Microsoft, Pepsi or McDonalds.

In a similar way, the DAX 50 ESG together: It is based on the indexes of the Dax family, i.e. the Dax, which lists the 30 largest listed companies, the MDax of the medium-sized stock exchange groups and the SDax of the smaller stock corporations.

The Dax 50 ESG excludes shares in companies that make most of their money from coal or weapons. Companies that are included in this index are, for example, Bayer, Siemens or Daimler – even though these groups are often the target of criticism from environmentalists.

The problem: if one sustainable stock index based on an existing index, it no longer contains certain companies. At the same time, however, it also does not specifically map companies that make their money from renewable energies, for example – provided they are not already in the base index.

He wants that Nature stock index change: It is not based on a conventional index, but contains 30 companies that follow specially developed criteria and are then checked. These are often rather unknown or new companies, such as the environmental bank, the US food manufacturer United Natural Foods or the American e-car pioneer Tesla.

If a sustainable investment is important to you, you should consider two things respect, think highly of:
1. Check which stocks of which companies track the index – and whether you like the index sustainable enough is.
2. You should definitely make sure that the ETF continues to spread your money wide enough. Because one wide spread means a lower risk of making losses. For example, if an ETF only invests in listed solar companies, the risk is comparatively high that you could lose your money – since this is a one-sided investment.

What is my return on a sustainable ETF?

Basically, with a sustainable ETF you can often achieve the same high return, called return, as with an investment in one conventional ETF.

For example, from 1997 to 2020, the Natur-Aktien-Index achieved an average increase in value of 9.9 percent per year. With an ETF on this index, you would have received a similarly high return – even if you still had to deduct taxes and fees.

As with conventional ETFs, the same applies to sustainable ETFs: the higher the potential return, the higher your risk.

A wind farm in the rapeseed field: Sustainable ETFs partially invest in renewable energies. (Source: imago images / snapshot)A wind farm in the rapeseed field: Sustainable ETFs partially invest in renewable energies. (Source: snapshot / imago images)

What other sustainable investments are there?

In addition to sustainable ETFs, you can also invest in sustainable equity funds that are actively managed. Then a fund manager chooses which companies to invest your money in.

A possible problem: A fund manager tends to focus on your return rather than sustainability – and is more likely to choose the former when weighing up sustainability and return. You should know that when you are in one active funds want to invest.

In addition, active funds are usually not as transparent, as the composition of the fund is only published on a certain key date or with a delay. In addition, an investment in active funds usually costs significantly more than in ETFs. This also applies to the sustainable variants (see below).

What does a sustainable ETF cost?

A few years ago, sustainable ETFs were still more expensive compared to traditional ETFs, meanwhile that has changed. The same costs apply that you should be aware of when investing in traditional ETFs. An overview:

  • Deposit costs: Since you also need to open a custody account to invest in sustainable ETFs, you should keep these fees in mind. In contrast to branch banks, many online providers and direct banks do not incur any costs for a deposit.
  • Administration fees: These are the costs that a fund company charges for offering a fund. These costs are often summarized in the total expense ratio (“TER” for short). In contrast to active funds, sustainable ETFs cost a lot less because there is no manager to pay for the Share trading controls. The TER amounts to approximately 0.1 to 0.5 percent of the total investment.

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