Three things to know about sustainable investment

Do you plan to grow your investment portfolio this year? Will ethics factor into the decision? More investors are choosing to invest sustainably and ethically but doing so can seem complex. Before you start moving your money there are three key points to consider.

Sustainable investment has grown in popularity. It’s about not only investing your money with companies that think and operate in a sustainable way, as well as thinking about profit.

Different people call the practice by different names. Some we’ve seen include: responsible investing, impact investing and ethical investing. Whilst each have slightly different meanings, when you dig deeper, their collective aim is to invest in a way that seeks to have a positive influence.

As more people become aware, ethical bank Triodos predicts the market will see a significant boost in the next few years. Research shows that more than half of investors want their money to support companies who make a positive contribution to communities, to society and to countries on a global scale. The UK market is expected to grow by 173%, reaching £48 billion, by 2027.

All investment decisions need careful research and planning to ensure they are right for you. When investing with an additional factor in mind, it can add to the work. Here are three areas to think about first.

1. Sustainable investment can cover Environmental, Social and Governance (ESG) concerns

Sustainable, ethical, responsible; they’re broad terms that can mean different things to different investors.

ESG criteria covers numerous different concerns, from the impact fossil fuels have on the environment to executive compensation. Sustainable funds have their own criteria when setting out where they’ll invest your money.

Sustainable investing can be being quite subjective. What you may deem as a sustainable stock, another investor may decide is unethical. Take pharmaceuticals, one person may decide it’s unethical due to animal testing, while another will argue it contributes to the development of society.

This can throw up some difficulties. So, you need to think about your top priorities. 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 different concerns and sustainability being subjective, it can be challenging to know where to invest. The good news is, that as more firms operate in this space and more investors choose to invest in this way, the options are growing.

2. There are different strategies

With sustainable investment priorities, there are different approaches you can use to make sustainability part of your focus and your investment.

  • 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:

  • 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, concluded that 88% of reviewed companies with robust sustainability practices demonstrate better operational performance. This ultimately translated into improved cashflow, which benefits investors.

Advocates of sustainable investments suggest that these over the long-term, 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 also 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 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 and 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.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.