When I first started exploring sustainable investing, I assumed it was simply about avoiding “sin stocks” like tobacco and gambling. I quickly discovered it’s much more nuanced than that.
Sustainable investing (sometimes called ESG investing, for Environmental, Social, and Governance) isn’t just about excluding certain industries. It’s about integrating non-financial factors into investment decisions – factors that often have very real financial implications over the long term.
For example, a company with poor environmental practices might face regulatory fines, cleanup costs, or consumer backlash. A business with weak governance might be more susceptible to corruption or mismanagement. These aren’t just ethical concerns – they’re financial risks that traditional analysis often overlooks.
My first attempts at sustainable investing were clumsy at best. I simply sold all my holdings in obvious “problem” industries like fossil fuels and tobacco, without really considering what to replace them with. The result was an unbalanced portfolio that underperformed because I’d made changes based on exclusion alone rather than thoughtful reallocation.
It took me nearly two years of research and some costly mistakes to develop a more sophisticated approach that balanced ethical considerations with financial goals. The key insight was understanding that sustainable investing isn’t about sacrificing returns for values – it’s about recognizing that environmental, social, and governance factors actually impact a company’s long-term financial performance.
The ESG Landscape in Indonesia: Challenges and Opportunities
As an Indonesian investor, I faced some unique challenges in building a sustainable portfolio. When I began this journey, ESG investing was still in its infancy here, with limited options and information compared to Western markets.
The Jakarta Stock Exchange (now IDX) had few dedicated ESG funds, and company disclosures on sustainability matters were often incomplete or inconsistently reported. I found myself having to dig much deeper to evaluate companies from a sustainability perspective.
But I also discovered some distinct advantages. Indonesia’s developing market status means many companies are still establishing their practices, creating opportunities for early investors to support and benefit from businesses that are building sustainability into their foundations rather than retrofitting it later.
For example, I invested in a mid-sized palm oil producer that was implementing sustainable cultivation practices from the start – a contrast to larger players that were struggling to reform entrenched destructive methods. That company has since outperformed the sector by over 30% as global buyers increasingly demand sustainably sourced palm oil.
The Indonesian government’s increasing focus on sustainable development has also created interesting investment opportunities. The commitment to increase renewable energy capacity to 23% by 2025 has spawned several promising companies in the solar and geothermal sectors – investments that align with sustainability goals while potentially benefiting from policy support.
However, I’ve had to remain vigilant about greenwashing– when companies exaggerate their environmental credentials. Early on, I invested in what appeared to be a progressive waste management company, only to later discover their recycling claims were vastly overstated. That painful lesson cost me both financially and emotionally.
Building a Balanced Sustainable Portfolio: My Step-by-Step Approach
After several years of trial and error, I developed a systematic approach to sustainable investing that has served me well. Here’s the process I now follow:
First, I clarify my own values and priorities. Sustainable investing isn’t one-size-fits-all – what matters most to you might differ from what matters to me. I’ve identified environmental protection and labor practices as my top concerns, while others might prioritize gender equality or animal welfare. Being clear about your own priorities helps guide decision-making when faced with trade-offs.
Next, I establish my financial goals and risk tolerance, just as with any investment strategy. Sustainable investing doesn’t mean abandoning financial objectives – it means pursuing them in alignment with your values.
With these foundations in place, I use a three-pronged approach:
- Negative screening: Excluding industries or companies that conflict with my values. For me, this means avoiding businesses involved in deforestation, exploitative labor practices, or excessive pollution.
- Positive screening: Seeking out companies leading in sustainability within their sectors. I look for businesses with robust environmental policies, fair labor practices, and strong governance.
- Impact investing: Allocating a portion of my portfolio (about 15%) to investments specifically designed to generate positive social or environmental impacts alongside financial returns, such as renewable energy projects or affordable housing developments.
I’ve found that maintaining sector diversification is crucial – another early mistake I made was ending up with a portfolio overly concentrated in certain sectors like technology and healthcare, while underweighted in others. Now I ensure I have exposure across all major sectors, but with the most sustainable players in each.
For example, rather than avoiding energy entirely, I invest in the energy companies making the most significant transitions to renewable models. This approach has actually yielded better returns than either a conventional energy investment or avoiding the sector altogether would have.
My current allocation is approximately 40% in Indonesian equities (with an ESG focus), 30% in international ESG funds, 15% in specific impact investments, and 15% in traditional fixed income for stability. This balance has served me well through various market conditions while aligning with my values.
The Performance Question: Do You Really Have to Sacrifice Returns?
The biggest misconception I encountered on my journey was the persistent belief that sustainable investing necessarily means accepting lower returns. My experience has proven the opposite.
Over the past eight years, my sustainable portfolio has outperformed my previous conventional investment approach by approximately 22%. This aligns with a growing body of research suggesting that companies with strong ESG practices often deliver better long-term performance with lower volatility.
However, I had to overcome several challenges to achieve these results:
The first was short-termism. In some cases, sustainable investments may underperform in the short term as companies invest in practices that build long-term value. During my first year of sustainable investing, I nearly abandoned the approach during a period of underperformance. Fortunately, I stayed the course and those early investments eventually delivered strong returns.
I also had to develop new analytical skills. Traditional financial metrics don’t capture many ESG factors, so I needed to learn how to evaluate non-financial information and understand its impact on business performance. This meant spending more time on research and developing new mental models for assessment.
The accessibility of quality ESG data was another hurdle, particularly for Indonesian companies. I joined several investor networks focused on sustainability, which helped me access better information and learn from others’ experiences. These communities have been invaluable resources in identifying truly sustainable investments versus “greenwashed” ones.
Finally, I had to recalibrate my expectations around different types of returns. Some of my investments have delivered benefits beyond financial performance – like the satisfaction of supporting businesses that align with my values and contributing to positive change. These non-financial returns have become increasingly important to me over time.
Common Mistakes I’ve Made (So You Don’t Have To)
Looking back over my decade of sustainable investing, I’ve made plenty of mistakes that you might be able to avoid:
My first error was going to extremes. Initially, I swung from a conventional portfolio to an extremely restricted one, which limited my opportunities and created unnecessary volatility. A more balanced approach would have served me better from the start.
I also fell prey to greenwashing several times, investing in companies that talked impressively about sustainability but weren’t backing it with action. I’ve learned to look beyond marketing materials to analyze actual practices, policies, and performance metrics.
Another mistake was neglecting governance factors in favor of more visible environmental issues. A seemingly eco-friendly company with poor governance eventually caused me significant losses when accounting irregularities emerged. Now I recognize that strong governance is often the foundation for reliable environmental and social performance.
I underestimated the importance of engagement. Initially, I simply bought and sold stocks based on their ESG credentials. Later, I learned that actively engaging with companies as a shareholder – through voting, attending meetings, and communicating with management – can both improve returns and drive positive change.
Perhaps my biggest mistake was trying to build a sustainable portfolio overnight. Rushing led to poorly researched decisions and an unbalanced allocation. A more gradual transition would have allowed for better decision-making and likely better performance.
Sustainable Investing in Practice: My Actual Process
To make this more concrete, let me walk through how I actually research and select investments for my sustainable portfolio:
First, I use ESG screening tools to identify potential investments that meet my basic criteria. For Indonesian stocks, this remains challenging, though improving. I rely on a combination of the limited local ESG ratings available, international assessments when available, and my own research.
When evaluating a specific company, I examine:
- Environmental policies and performance metrics (emissions, resource use, waste management)
- Labor practices and community relations
- Governance structure and history
- Controversies or legal issues related to ESG factors
- Industry-specific sustainability challenges and how the company addresses them
For example, when considering a bank for investment, I look beyond financial performance to examine its lending policies (does it finance destructive industries?), internal practices (how does it treat employees?), and governance structure (is there appropriate oversight?).
I maintain a spreadsheet that scores potential investments across both financial and ESG metrics. This helps me make more objective comparisons and track how my assessment criteria evolve over time.
For international exposure, I utilize established ESG funds and ETFs, evaluating them based on their methodology, performance, fees, and transparency. I prefer funds that take an integrated approach rather than simply excluding certain industries.
I review my portfolio quarterly from both a financial and sustainability perspective. This regular assessment helps me identify areas that need rebalancing or investments that no longer meet my criteria due to changing practices or new information.
The Future of Sustainable Investing in Indonesia
Looking ahead, I see tremendous potential for sustainable investing in Indonesia. Our country faces significant environmental and social challenges, from deforestation to inequality, creating both urgency and opportunity for investments that address these issues.
Regulatory support is growing, with the Financial Services Authority (OJK) increasingly promoting sustainable finance through its Sustainable Finance Roadmap. This regulatory backing will likely improve disclosure quality and expand sustainable investment options in coming years.
International pressure is also driving change. As global supply chains face greater scrutiny, Indonesian companies are recognizing that strong ESG practices aren’t just ethically sound but essential for accessing international markets and capital.
For individual investors, I expect more accessible tools and information to emerge, making sustainable investing less daunting for newcomers. The current barriers of limited data and investment options will likely diminish as market demand grows.
My advice to Indonesian investors just beginning their sustainable investing journey is to start gradually, focus on learning, and don’t expect perfection immediately. Sustainable investing is itself a sustainable practice – it’s about continuous improvement rather than overnight transformation.
Balancing Head and Heart in Your Investment Decisions
After ten years on this path, the most valuable lesson I’ve learned is that sustainable investing works best when it balances analytical thinking with personal values – the head and the heart.
The analytical side requires rigorous assessment of how ESG factors affect business performance and risk. This isn’t about feeling good – it’s about recognizing that issues like climate change, resource scarcity, labor practices, and corporate governance have material financial implications.
The values side involves clarifying what matters to you personally and how you want your investments to reflect those priorities. This varies widely between individuals and cultures, making sustainable investing a highly personal practice.
When these two elements work in harmony, sustainable investing becomes both financially rewarding and personally meaningful. My portfolio now reflects my values while delivering returns that support my family’s financial goals – a balance that seemed elusive when I began this journey.
That question my daughter asked years ago led to a complete transformation in how I think about money and its purpose. My investments are no longer disconnected from my values but have become an expression of them. And rather than sacrificing performance, this alignment has enhanced it.
Whether you’re considering sustainable investing out of concern for specific issues, desire for better risk management, or simply the recognition that the world is changing, I encourage you to take that first step. The path may not always be straight, but in my experience, it leads to both better returns and greater satisfaction with how your money is working in the world.
