Sustainable investments are neither riskier nor safer than traditional investments. In general, the risk of an investment depends on various factors, such as the investment conditions, the environment of a company or the sector in which you wish to invest, as well as general market trends.

However, sustainable companies may be less exposed to certain risks such as environmental litigation, social disruption, reputational risks or consumer boycotts.

It is important to do your own research and analysis to understand the specific risks associated with your sustainable investments, just as you would with your traditional investments. Before investing, you should consider your sustainability preferences, your investment objectives and your own risk tolerance.

Risk tolerance helps dictate your investment strategy: the more risk you are willing to take, the greater the asset fluctuations are likely to be and the closer you will need to monitor your portfolio of securities. Diversification helps to smooth out risks and limit losses. These recommendations are true for both sustainable and traditional investments.

Nohalteg Finanzen 10.05.2023

What is the risk if sustainability criteria are not taken into account in investment decisions?

Not taking sustainability criteria into account when making investment decisions can lead to risks for investors, for the environment and for society in general.

Firstly, there is the risk of long-term financial underperformance, as companies that are not sustainable may face financial and reputational problems affecting their future growth. Investment performance can also be affected if companies are exposed to environmental or social risks, such as climate change or human rights scandals.

These are known as stranded assets, i.e. investments or assets whose value is devalued by changes in legislation, environmental constraints or technology.

Furthermore, the absence of sustainability criteria can have a negative impact on the environment and society in general. Unsustainable companies can cause significant environmental damage, such as air and water pollution, deforestation or destruction of natural habitats. They can also have a negative impact on local communities, especially on vulnerable populations such as workers, women and children.

There are many reasons why companies that do not make sustainability efforts may be exposed to higher risks. It is therefore advisable to take sustainability criteria into account in your investment decisions and to ensure that the capital invested is directed towards companies that strive for sustainability and aim for stable long-term growth. Extra-financial reports published by companies can help you assess their sustainability efforts.

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What determines the risks when investing?

Risks vary depending on the investment.  It is therefore important to understand them before making a decision. The following risks can be distinguished:

- Market risk 

Market risk is the risk associated with fluctuations in the financial market, such as fluctuations in share prices, interest rates or commodity prices.

- Credit risk

Credit risk is the risk that the borrower will not be able to repay the principal or interest on a loan or investment.

- Liquidity risk

Liquidity risk is the risk that the investor will not be able to sell the investment quickly or at a reasonable price.

- Operational risk

Operational risk is the risk associated with the company's activities, such as production problems, management, regulatory, safety or reputation risks.

- Sector risk

Sector risk refers to risks that are linked to a certain sector. For example, some sectors are more risky than others due to competition, government regulations and changes in technology.

- Political risk

Political risk is the risk of political, economic or regulatory changes that may affect investments, such as changes in tax policy or geopolitical tensions.

In general, it is always a good idea to diversify your investments, monitor them regularly and adjust your investments according to market developments.

Should you avoid large energy companies if you want to invest sustainably?

Large energy companies can often have practices that are considered unsustainable, such as the use of fossil fuels and the emission of greenhouse gases.

However, some of these companies are converting their operations to renewable energy as part of the energy transition and thus contributing to a more sustainable future.

Considerable investment is needed to make a successful transition to a sustainable energy supply. By supporting these companies in their transition you can contribute to the reduction of greenhouse gas emissions and help protect the climate.

Ultimately, the decision to invest in such an energy company depends on your own values and sustainability criteria.

Why is the transition to sustainable finance without alternative?

It has become increasingly clear that the economic and financial models of the past are no longer viable in the long term. Companies that do not take environmental, social and governance (ESG) factors into account are increasingly faced with financial risks, such as regulatory costs, reputational losses, transition costs, productivity losses or climate change adaptation costs.

At the same time, consumers and investors are increasingly aware of the impact of their financial choices and seek to invest in companies that have a positive impact on the environment and society. Governments, regulators and international organisations are also working to put in place rules and standards to encourage sustainable finance.

Ultimately, sustainable finance is an essential choice to ensure long-term economic and financial stability, to address environmental and social issues, and to meet stakeholder expectations.

Definition of the month: stranded assets

This is a term used in finance to refer to investments or assets that lose their value due to market changes. This devaluation of assets is mainly linked to sudden and significant changes in legislation, environmental constraints or technological innovations, which then render the assets obsolete before they are fully depreciated.

All markets can be affected by this rapid loss of asset value: technologies, energy, automobiles, etc.

This notion of "stranded asset" has gained importance because of the environmental and climate concerns that have grown since the 1990s.

The fossil fuel sector (oil, gas, coal) is beginning to be affected by this type of devaluation.

Fossil fuel companies risk losing value in the eyes of investors because they cannot exploit their wealth due to environmental and climate protection regulations such as: the carbon market, carbon taxation, CO2 emission limits, green bonds...