Your money as a force for good: How to save and invest ethically and sustainably

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In another article, we briefly touched on the topic of sustainable savings and investments. It’s such a big topic, we thought that it warranted its own dedicated article. Furthermore, a study by the Responsible Investment Association Australasia (RIAA) found that 83% of Australians and 73% of Kiwis expect their savings and investments to be used responsibly and ethically, to make a positive impact on the world we live in. Yet, only 36% of Australians and 48% of Kiwis are confident in their knowledge about ethical and sustainable investing. That’s a big (knowledge) gap. So, today’s (comprehensive) article is all about demystifying sustainable finance.

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Do you know what it means to save and invest ethically and sustainably? | Photo by Omid Armin on Unsplash

Disclaimer: While we share what we have learned working in the financial services industry for almost two decades and managing our own finances, this article does not constitute financial advice.

What is sustainable and ethical finance?

Sustainability and sustainable finance

The Brundtland Report, commissioned by the UN in 1987, defined sustainability as meeting the needs of the present without compromising the ability of future generations to meet their own needs. The needs of current and future generations hereby boil down to three interrelated elements: economic prosperity, social justice and a healthy environment.

Sustainable finance thus, by definition, requires us to

  • take a long-term and holistic view with regard to risks and returns (beyond the traditional focus on profits to include the environmental and social impacts of our economic activities), and
  • use savings and investments to fund a world in which people and the planet are on par with profits (achieving a triple bottom line).

Ethics and ethical finance

Ethics by definition are moral principles that govern a person’s behaviour and actions. Ethical finance thus means aligning our savings and investments with our values and moral principles. Our values and moral principles become the primary filters when making savings and investment decisions.

While there is considerable overlap between ethical and sustainable finance there are subtle differences.


Triple Bottom Line by Daniel Oberg on Unsplash

Sustainable finance puts people and planet on par with profits

What are ESG criteria?

To generate long-term financial returns as well as positive environmental and societal impact, players in the sustainable finance space consider environmental, social and corporate governance (ESG) criteria (in addition to traditional risk/return criteria to maximise shareholder value) when assessing financing opportunities:

  • Environmental factors (E) affect the natural world. They include aspects like a company’s carbon and water footprints, and activities to reduce both.
  • Social factors (S) concern local and global communities, and include a company’s workforce diversity and inclusion, working conditions and compensation.
  • Governance factors (G) relate to a company’s inner workings and decision-making processes. They include things like the makeup of its board, and how transparent it is about its policies and activities.
Risk dices by Wokandapix on Pixabay

Incorporating ESG criteria is a holistic, long-term risk management tool | Photo by Wokandapix on Pixabay

How do ESG criteria relate to ethical and sustainable saving and investing?

Incorporating ESG criteria when assessing a company becomes a tool to assess and manage risks and opportunities holistically and with a long-term view. Bringing the ethical element into the equation means applying the ESG criteria in a way that represents our moral principles and values as savers and investors.

To give you an example:

Let’s say there is a managed fund with sustainable or ESG in its name. With one of our core values being sustainability, we could assume that by investing in the fund, we’re aligning our investments with our moral principles and values. However, when we have a closer look at how the fund applies ESG criteria, we find that it excludes companies that make weapons or extract fossil fuels but invests in fast fashion brands we know exploit their workers and pollute the environment.

So, while the fund may be considered ‘sustainable’ by excluding certain industries or companies, it may not match OUR definition of ethical and sustainable investment.

Carnations by Edward Howell on Unsplash

An ESG fund may not match OUR definition of ethical and sustainable investment | Photo by Edward Howell on Unsplash

While the concept of sustainable finance is aimed at the right outcomes, sustainable investing, in particular, comprises a range of strategies, and unfortunately, companies and investment managers may also use sustainability as a marketing ploy (we’ll talk about greenwashing and other concerns a bit later in this post).

As with other decisions we make on a daily basis: it pays to look under the hood and go into it with our eyes wide open.

Why is saving and investing ethically and sustainably important?

As outlined in the simple and effective ways to reduce your carbon footprint,

Fortunately, we do have a choice. We can (re)direct our savings and investments to help build a healthier, more equitable world. Global ESG assets under management (AUM) accumulated to USD35.3t in 2020, more than a third of all AUM worldwide, and are set to surpass USD53t by 2025.

Our financial system is contributing to environmental degradation and entrenching inequality across many measures […] Sustainable finance is a key component in a society where nature and all communities thrive. (Toitū Tahua Centre for Sustainable Finance New Zealand)

No business on a dead planet by Markus Spiske on Unsplash

In 2021, $4.582t of our savings and investments were used to fund fossil fuels

That may all be well and good, you might think, but wouldn’t invest ethically and sustainably mean sacrificing financial returns? Let’s spend a moment addressing this concern.

How do the financial returns of sustainable funds compare with traditional investments?

Taking a holistic and long-term approach and investing ethically and sustainably is not only the right thing to do. It also seems to lead to better outcomes for people, the planet and profits.

A study published in 2016 found that ESG companies

  • showed lower volatility in their stock performances than their peers in the same industry, and
  • achieved better financial returns than their peers in eight out of 12 industries. Only in automobiles, durables, and banking and insurance, ESG companies underperformed their peers.
ESG factors and risk adjusted performance Returns Comparison

ESG companies achieved better financial returns than their peers in 8 out of 12 industries

ESG factors and risk adjusted performance Volatility Comparison

ESG companies showed lower volatility in their stock performance than their peers

A study conducted by the Morgan Stanley Institute for Sustainable Investing, covering more than 10,000 mutual and exchange-traded funds (ETFs) between 2004 and 2018 confirmed:

the returns of sustainable funds were in line with their traditional counterparts, and
sustainable funds experienced a 20% lower downside risk than traditional funds.
Especially during periods of higher market volatility, sustainable funds seem to perform better than their traditional counterparts. In 2020, for example, 75% of sustainable funds outperformed their traditional peers.

Morningstar ESG Quartile Rankings 2020

According to Morningstar, 75% of sustainable equity funds outperformed their traditional peers in 2020

And finally, the MSCI KLD400 Social Index, one of the first indices measuring the ESG performance of US companies, shows not only better-annualised returns of ESG-focused companies over 3, 5 and 10 years but also lower maximum drawdowns (losses) during the Global Financial Crisis than its (unscreened) parent index, the MSCI USA IMI.

While there is clear evidence that sustainable funds don’t disadvantage investors from a return or risk perspective, what constitutes a sustainable fund is defined quite broadly, and not all sustainable funds are created equal. Let’s spend a moment elaborating.

How do investment funds incorporate ESG factors?

Sustainable investment strategies

There are (almost) as many investment approaches as there are fund managers on the planet. Which doesn’t make comparing investments any easier.

However, based on the investment strategy applied, sustainable funds can be grouped as follows:

ESG IntegrationNegative/Exclusionary ScreeningNorms-based screeningCorporate engagement and shareholder actionPositive/Best-in-class screeningSustainability-themed investingImpact Investing
Explicitly and systematically including ESG risks and opportunities into financial analysis and investment decisionsExcluding specific countries, sectors and/or companies based on activities considered not investable due to unacceptable risk or values misalignment (for example, weapons, fossil fuels, tobacco)Excluding companies that do not meet minimum standards of business practice based on international norms and conventionsExecuting shareholder rights to drive desired corporate behaviours in line with comprehensive ESG guidelinesIntentionally investing in industries or companies assessed to have better ESG performance relative to benchmarks or peersIntentionally investing in companies that provide solutions to specific sustainability themes (for example, climate change, gender equity)Investing to achieve specific positive social and environmental goals, demonstrated by measuring of investment intent and impact (for example, BlueOrchard Finance and Triodos Investment Management)

What sustainable investment strategy has the biggest impact?

While not clear-cut (and bearing in mind that a fund can apply more than one of these strategies), there is a bit of an evolution from left to right:

  • Investment managers, as they first embark on assessing investment opportunities beyond their financial value, start by measuring their status quo based on ESG criteria to understand what they are invested in.
  • As they find pertinent risks from an ESG perspective, they exclude the highest-risk companies to reduce their exposure. Or they dial up their corporate engagement. This means they drive change through actions like voting for the adoption of an ESG-based remuneration framework or an independent review of a company’s OHS framework.
  • With investors increasingly interested in investments that (proactively) contribute to change in specific areas (like clean water, regenerative agriculture or green transport), investment managers use ESG criteria not only to mitigate risk but also to identify opportunities and create portfolios that meet investor demands.

On the right side of the table, for example, you would find investments in companies that develop carbon sequestration technologies. As these technologies are relatively new, these companies tend to be start-ups or early-stage businesses. And as they are not (yet) publicly traded, this is the space where Private Equity funds and Venture Capital firms operate.

What sustainable investment strategies are most prevalent?

Looking at the chart below, you will notice that the most common sustainable investment strategy globally is ESG integration, followed by negative/exclusionary screening, and corporate engagement and shareholder action:

Global Sustainable AUM by ESG Investment Strategy 2020

87% of global sustainable AUM fall into three sustainable investment strategies | Source: GSIR 2020

This is representative of a market that is still young and evolving, in comparison to traditional investment approaches. While not new, investing sustainably has really only taken off since the beginning of the 21st century – especially in the past decade.

How to save and invest ethically and sustainably?

As with so many things in life: start with your values. Work out what is important to you and what you won’t compromise on. Only once you have clarity about your core values, proceed to the next steps.

Choosing a provider for your transaction and savings account

Most of us already have a transaction and/or savings account (or even multiple). So, start by looking up your bank/s in tools like

If your bank is not listed, check their website and ask them a few in-depth questions, including:

  • What is the bank’s lending policy?
  • What industries or companies do they not lend to?
  • Do they specifically focus on lending to small and medium-sized enterprises to help create jobs in local communities?
  • Do they issue social and/or green bonds to finance specific projects that help people and/or the planet?
  • Do they pay fair wages and their fair share of taxes?
  • Check if your bank lends to fossil fuel companies – Switch provider if they do

Another indicator that your bank takes sustainability seriously, is the way it reports crucial ESG information, including

  • Does it report its loan portfolio based on its contribution to the 17 UN Sustainable Development Goals (SDGs) and/or its alignment with the Paris Agreement to reach net zero by 2050?
  • Is the Bank measuring and reporting its own carbon footprint (and how it has been changing year on year)?
  • Does it have a net-zero emissions target?
  • How is it tracking against that goal? And how much of that goal is achieved by actual emissions reduction vs the purchase of carbon offsets?
  • Does the bank measure its performance and actively pursue improvements around pay equity, diversity and inclusion?
  • Does sustainability form part of the bank’s remuneration framework?

It may not be easy to track down that information. But the fact that a financial institution has a lot of it on its website and in its annual reports already tells you a lot. Transparency is key: Banks that don’t have anything to hide and which are passionate about contributing to a better world will talk about it openly (and will track their contribution).

A final note: No financial institution is perfect when it comes to sustainability. And the most sustainable financial institutions may not operate in your country. It’s important that you are comfortable with how your savings are being used. Choose the best alternative for your country and review your decision every few years.

Saving ethically and sustainably – What do we do?

With our nomadic lifestyle, we have transaction and savings accounts where we have passports: in New Zealand, Australia and Germany. Most of our savings are in AUD and NZD, so let’s talk about those here.

Our savings account in Australia is with Rabobank. As one of the larger global banks, Rabobank is listed on and BankTrack. According to, Rabobank has been using our savings to fund some questionable projects to the tune of about $8bn between 2016 and 2021. With that, Rabobank places 50th among the Top 60 largest fossil fuel financiers according to the Rainforest Action Network’s Fossil Fuel Finance Report 2022. Some of these questionable projects are listed on BankTrack. This is despite the bank’s commitment to a lengthy list of sustainability standards. Ouch. Needless to say: We will be looking for a more sustainable financial institution for our AUD savings.

Our savings account in New Zealand is with Heartland Bank. Heartland Bank is a member of the Climate Leaders Coalition and reports on its sustainability journey annually. It aims to reduce GHG emissions by 35% in 2026 from its FY2019 baseline of 1,157t CO2e. The bank is a Rainbow Tick-certified and hearing-accredited workplace. It is also an accredited living wage employer and reports on its gender pay gap (and measures to reduce it). Unfortunately, it didn’t feature in the most 350 Aotearoa Report. It would be great to see how it stacks up against its peers in New Zealand.

Choosing a company or product to invest in

If you are already an investor (whether through your pension/superannuation fund or directly), start by checking where your money is invested. If you are new to investing, do your homework. And choose a company, investment manager or investment product that aligns with your values.

“It’s not an investment if it’s destroying the planet” (Vandana Shiva, Author and Environmental Activist)

If you (want to) invest in individual companies, check their investor communication. Especially their annual reports should include chapters that talk in-depth about their sustainability policies and principles, supply chain, board makeup, etc. If you (want to) invest in an investment fund that comprises a collection of companies (for example, an ETF), read the fund’s information memorandum and annual reports, with a specific focus on the following questions:

  • What are the fund’s investment philosophy and process? Does it screen out certain companies (and on what basis)? Or does the investment constitute a portfolio of companies specifically chosen for their best-in-class ESG credentials?
  • What companies does the fund invest in? Ideally, you’d want to see the whole portfolio, not just the top 10 companies, to ensure the portfolio aligns with your expectations (values and moral principles).
  • What data sources do they base their investment decisions on? Larger investment management firms will have an in-house research team, smaller ones are more likely to utilise 3rd party research.
  • How long have the fund managers (the actual staff members managing the investment fund) been managing ESG funds?
  • How do fund managers vote on key issues? Are they taking an active stance and voting in line with the ESG expectations of their investors? Do they challenge controversial issues and vote against board recommendations where required?


Ignorance sign by Gerd Altmann on Pixabay

Do your research to understand how and where your money is invested

Investing ethically and sustainably – What do we do?


Having worked in Australia for many years before our lifestyle change, a large portion of our investments is held in our Superannuation funds (effectively a personal pension fund we have access to when we reach a certain age). We both have our Super with Rest and are invested in the Overseas Shares Index option. That particular option has 100% of its money invested into a single fund – the Macquarie True Index International Equities Fund.

The Macquarie True Index International Equities Fund is a traditional wholesale fund designed to replicate the (performance of the) MSCI World ex-Australia Net Dividends Reinvested (Unhedged AUD) Index. The fund has about AUD 887m AUM (as of 31 March 2022).

FinanceMap identified a Paris Alignment of -32% due to its 4.86% holding in Power, 1.98% in Automotives and 0.85% exposure to Coal. We chose Rest due to its low fees, and because it is one of the few providers that offer index investment options. As more index funds are being added to the Australian superannuation system, we’ll look for a more sustainable investment option.

Investments outside of Superannuation
95% of our investment portfolio (outside of our Super) is comprised of Equity ETFs. And 71% of that is invested in a single (ESG) fund: the BetaShares Global Sustainability Leaders ETF (ETHI).

ETHI is a globally diversified, passively managed ETF. It tracks the performance of the NASDAQ Future Global Sustainability Leaders (Currency Hedged AUD) Index. The fund has just over AUD 2bn AUM (as of 26 April 2022).

ETHI applies a negative screening strategy, excluding (or placing heavy restrictions on) a range of companies/industries, including (big financiers of) the fossil fuel industry as well as uranium and nuclear energy, weapons manufacturing, gambling, tobacco, alcohol and junk food producers. The fund also excludes companies with evidence of human rights violations and animal cruelty. It’s not perfect, but it’s a start.

FinanceMap identified a Paris Agreement alignment of -45% due to its 4.27% holdings in Automotive stocks and 0.37% holdings in two utility companies that supply drinking water and recycle wastewater. TrackInsight (using Conser’s consensus methodology) has not yet rated the fund’s sustainability performance but did rate its Canadian sister fund with B+ (Good). We chose ETHI as our core investment because it gives us exposure to an ESG-screened, globally diversified investment portfolio at a low cost. Similar to our Superannuation, we will continue to monitor the market for a more sustainable option.

A word on ESG scores

When assessing companies and investment funds, at one point or another, you’ll come across the concept of ESG scores. An ESG score is a data point intended to rate and compare companies and investment funds based on their performance in relation to the ESG factors we mention above.

There are two worthwhile things to note:

  • An ESG score is a single score that represents three different aspects (environmental, social and governance factors) and many measures within each aspect. That’s like describing a person using only one word.
  • There is no universal framework that scores the ESG performance of a company or fund (but a myriad of methodologies), which makes comparing investment funds that are rated by different methodologies difficult.

So, when assessing companies or investment funds take the ESG score with a grain of salt. (At the very least) check what drives the score and how the underlying elements compare between companies or funds you might want to invest in.

This brings us to the final chapter of this post.

Book of knowledge by Gabriella Clare Marino on Unsplash

When assessing companies or funds don't rely on ESG scores alone

Sustainable finance is not without criticism

Let’s talk about greenwashing

According to Investopedia, “Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound [than they actually are].”

With the proliferation of ESG investing over the past decade, in particular, standards and regulations have not been able to keep pace, leaving (a lot of) room for abuse and leading to

  • Companies misleading lenders and investors about their ESG performance,
  • Banks misleading their customers about the sustainability of their lending portfolio and their own ESG performance, and
  • Investment managers misleading (retail) investors about the ESG credentials of their investment products – especially if there is a monetary incentive for fund managers to channel investor money into a more expensive ESG portfolio (over a comparable traditional product).
Eco labelled beach trash by Brian Yurasits on Unsplash

Greenwashing is pretending to be more environmentally friendly than you are

Specifically, we need standards and regulations

  • around what constitutes a sustainable activity,
  • how ESG performance is measured, and
  • how sustainable investment products are marketed.

Standards and regulations are tightening around the globe – the EU’s Taxonomy for Sustainable Activities is one of the more recent examples. But there is a lot more work to be done to get the industry on the straight and narrow.

Greenwashing is not easy to identify. But asking questions like the ones we have listed above will point out the bad apples. As mentioned before: Transparency is key. Companies, financial institutions and fund managers that are not forthcoming with information or whose responses are generic/deflecting might be hiding something.

“Thirty years down the line, it’s hard for me to imagine an investment that does not take into account some combination of ESG […]. It’s going to become the norm.” (Ioannis Ioannou, Professor of Sustainable Investment at London Business School)

Other arguments against sustainable finance

Some big-name investors and (ex-)investment professionals discourage the focus on environmental, social and governance factors, and we’d like to finish today’s post by assessing the top 3 arguments we’ve come across during the research for this article:

Argument one

Investment managers have a fiduciary duty to those whose money they are managing. ESG criteria can therefore only be incorporated insofar as they don’t detract from an investment manager’s focus on maximising profits for the shareholder.

Our Thoughts: Fiduciary duty doesn’t mean sole focus on maximising shareholder profits (though it has been the focus traditionally). By definition, fiduciary duty obligates one party (the investment manager) to act solely in the interest of the other (the investor). Therefore, if the investor’s interest is to invest ethically and sustainably (with a focus on a triple bottom line), under their fiduciary duty, an investment manager would have to incorporate ESG criteria.

Wall Street by Chenyu Guan on Unsplash

Fiduciary duty is often used as an excuse to ignore people and planet

Argument Two

Divesting from high-risk companies doesn’t introduce any new capital and thus doesn’t really make a difference. Stocks are traded on exchanges and those divested shares are just held by someone else.

Our Thoughts: Granted, divesting bad apple stocks from a portfolio doesn’t wipe the company off the face of the earth. Someone else will continue to hold that stock. But, imagine that the company is an energy company reliant on fossil fuels (with no intention to adapt to a low-carbon economy). Now imagine a carbon tax was introduced, and the energy sector would move to renewables. Do you think consumers will continue to buy their electricity from that provider? Do you think the company will remain competitive?

By divesting the bad apple stocks from your portfolio, you remove the risk. If someone else is happy to hold that risk, it’s their decision. Divesting won’t have an immediate impact, but as markets change (through consumer pressures, legislative changes, etc), companies that don’t adapt will be losing (and so will their investors).

Factory by Patrick Hendry on Unsplash

Divesting bad companies doesn't automatically make the world a better place

It is also correct that divesting in itself doesn’t introduce new capital. The majority of retail investors don’t have the kind of cash sitting around that lends itself to impact investing. And they don’t have the risk appetite that comes with more illiquid investments either. However, as Private Equity funds and Venture Capital firms help new businesses reach scale, these companies will eventually make their appearance on the stock market. And divested capital can then be reinvested to continue to support these companies.

Argument Three

Relying on companies and investment managers to do the right thing for people and the planet is like asking sharks to tame their appetites in a feeding frenzy. Real change can only be achieved through mandatory and systemic changes to the rules of competition. That is, by pricing in externalities through the introduction of a carbon tax. And making those mandatory and systemic changes is the role of elected governments, not investment managers.
Our Thoughts: Totally agree that we need (significant and immediate) system change. Not only do bad apple companies produce negative externalities people and the planet are paying for, they often exploit legislative loopholes to exacerbate those negative externalities or are subsidised to make their products cheaper compared to more sustainable alternatives.

We need an equal playing field. We need to close loopholes, and end (the wrong) subsidies and price externalities. And yes, only governments can implement those changes. But we also can’t wait for governments to do their bit. Especially not when powerful industry groups lobby and financially support those elected officials. How likely are these officials to bite the hand that feeds them?

It’s not a choice between one OR the other. We need to take action on ALL fronts.

System change by Ma Ti on Unsplash

We must enforce change on all fronts, as consumers, savers, investors and citizens

Want to learn more?

Our article today (while longer than usual) really only scratched the surface of sustainable finance. If you’d like to learn more, here are some worthwhile resources to check out.


Podcasts and Courses

What do you think about save and invest ethically and sustainably?

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Your money as a force for good: How to save and invest ethically and sustainably
Author: <a href="" target="_blank">Sandra Rosenau</a>

Author: Sandra Rosenau

Sandra Rosenau is a Gen X gal from Germany, born and raised behind the Iron Curtain, with an unquenchable thirst to learn. Self-starter. Multi-lingual. Minimalist. Environmentally conscious. Financially and location independent. Energised by connecting with others and helping people succeed.