Building a Sustainable Portfolio

This chapter complements the previous chapter on sustainable finance and investing, by looking in more detail at a range of implementation strategies across the main financial instruments. The chapter begins with an introduction to the main asset classes present in the financial market (bonds, loans, equity, mutual funds, and exchange-traded-funds (ETFs)). The chapter distinguishes between debt and equity instruments. Since their creation in 2007, more than $4 trillion of sustainable debt instruments have been issued. This estimate does not capture several sustainability-related areas that are not specifically classified as sustainable such as renewable energy financing, project finance, capital markets for infrastructure, etc. The chapter highlights the fact that it is now possible to employ investing strategies considering sustainability across nearly all financial products, which in turn makes it possible to build a sustainable portfolio. The chapter also introduces the popular Green, Social, and Sustainable bonds, and loans (sustainable debt with the Use-of-Proceeds approach) as well as the Sustainability-linked debt instruments (sustainable debt with the Objectives approach). Portfolios can be built either by investors themselves, or with the support of financial advisors. Investors can also purchase diversified pre-built portfolios like ETFs or mutual funds following sustainable investment strategies. However, while the proportion of sustainable products has dramatically increased, it still does not represent most financial assets. Strikingly, in certain regions such as Europe, considering sustainability risks is now mandatory for all financial products. The chapter concludes with an example of a climate change portfolio.