Are you planning to grow your investment portfolio this year? Are you interested in incorporating your ethics into the decision? More investors are choosing to invest sustainably, but it can seem complex. If it’s something you’re thinking about, we look at three key things to understand before you start moving your money.
Sustainable investment has gradually been moving into the mainstream. It’s about investing your money with the objective of backing companies that operate in a sustainable way, as well as thinking about profit.
You may have heard the practice referred to by different names; responsible investing, impact investing and ethical investing, to name a few. Whilst they often have slightly different meanings when you dig deeper, they’re all broadly about investing in a way that seeks to have a positive influence.
As more investors become aware of the trend, ethical bank Triodos predicts the market will benefit from a significant boost. Past research found that more than half of investors would like their money to support companies making a positive contribution to society. In fact, the UK market is expected to grow by 173%, reaching £48 billion, by 2027.
All investment decisions take careful research and planning to ensure they’re right for you. When investing with an additional factor in mind, it can take even more work. Here are three areas to think about first.
1. Sustainable investment can cover many different Environmental, Social and Governance (ESG) concerns
Sustainable, ethical, responsible; they’re all very broad terms that can mean different things to different investors.
ESG criteria can cover numerous different concerns, ranging from the impact fossil fuels have on the environment to executive compensation. Sustainable funds will have their own criteria when setting out where they’ll invest your money.
The varying objectives result in sustainable investing being quite subjective. What you may deem as a sustainable stock, another investor may decide is unethical. Take pharmaceuticals, for example; one person may decide it’s unethical due to animal testing, while another will argue that it contributes to the development of society.
This can throw up some difficulties when you’re deciding where to invest. First, you need to think about what your top priorities are. The Triodos research highlighted the areas that investors are most likely to avoid:
- Manufacturing or selling of arms and weapons (38%)
- Worker/supply chain exploitation (37%)
- Environmental negligence (36%)
- Tobacco (30%)
- Gambling (29%)
With ESG covering many different concerns and sustainability being subjective, it can be challenging to find investment options that match your goals. The good news is, that as more firms put sustainability into practice and more investors choose to invest in this way, there is an increasing number of options.
2. There are different strategies
With your sustainable priorities set out, it’s not as simple as then just investing your money. As with all investments, there are different strategies you can use to make sustainability part of your portfolio.
- Do you want to actively avoid companies that operate in sectors deemed unethical?
- Or would you prefer to invest in firms that are at the forefront of making sustainable changes?
Much like any investment portfolio, a sustainable investment needs to reflect your objectives. This should combine your aspirations and your financial situation, such as your investment risk tolerance and portfolio size.
When factoring in your personal sustainability goals, there are three main ways to do so:
- The first is known as negative screening. This is where you avoid investing in certain industries or companies because their practices don’t align with your ethical stance.
- In contrast, positive screening would see you investing in companies that are working to improve the concerns you have.
- Finally, engagement is where you use your shareholder power to exact change within companies.
As the latter strategy requires you to hold a significant amount of power, it’s an option that’s more commonly used by institutional investors, rather than individuals.
3. Sustainable investing doesn’t mean lower returns
Even when sustainability is a consideration, the returns you make from your investments are still important. It’s a common belief that investing with other factors in mind leads to lower returns. However, there is research that suggests this isn’t always the case.
Research published by the University of Oxford and Arabesque Asset Management in 2015, for example, concluded that 88% of reviewed companies with robust sustainability practices demonstrate better operational performance. This ultimately translated into improved cashflow, which in turn, benefits investors.
Advocates of sustainable investments suggest, over the long term, sustainable investment may outperform alternatives as they consider more risk factors. While investment performance can’t be guaranteed, the research indicates that sustainability and profitability aren’t incompatible.
Research suggests that ethical investing can be just as profitable but there are some key things to keep in mind. First, all investments come with a level of risk and there is a chance that the value of your investments (and any income from them) will decrease. Second, comparing past performances of funds and stocks doesn’t give you a reliable indicator of how they’ll perform in the future. Finally, sustainable investment is still a developing market.
If you’d like to discuss investing, including what sustainable investment means to you and how to incorporate it into your financial plan, please contact us.