Ethical & Sustainable Investing – How to Guide

As issues like climate change and green energy become increasingly prevalent so too does ESG investing. Here, Financial Planner Ed Stubbs answers some questions we’re often asked about ethical and sustainable investments.

In an economic and political climate that is increasingly focused on green investments, it’s not just the government and large corporations that are switching their focus to more ethical and environmentally friendly investments. In fact, since the Coronavirus pandemic, ESG investments have proved both popular and fruitful, in some cases more so than their non-ESG counterparts. For this reason, coupled with a personal dedication to sustainable investing, many clients are seeking new sustainable investment opportunities. And the cumulative growth of these kinds of investment funds has the potential to make a significant impact on climate change and other sustainable investment goals.

What is ESG Investing?

ESG stands for Environmental, Social & Governance. This form of investing is all about balancing socially responsible investments that consider a company’s impact on the environment, its stakeholders, and the planet, alongside the financial returns for the individual investor with the aim of ending problems like climate change, wasted land, low wages, housing shortages, modern slavery, pollution, and child poverty.

Currently, ESG and sustainable investment funds are the fastest-growing segment of the European funds market as it becomes ever-more important to investors to do good with their money. In response to this growing interest in ESG investments, many funds that meet all kinds of objectives and investment strategies have applied for authorisation with an ESG focus and many existing funds are also amending their objectives to gain ESG authorisation.

This is important to us and we’re here to support and advise you with your ethical investment strategy, ensuring that we create your WealthPlan™ and manage your investment portfolio with this objective in mind.

How to identify funds with ESG approval?

There isn’t currently a set criterion that a fund must meet to be considered ESG-approved. However, it’s recognised that investors must feel confident they’re putting their money in the right place. For this reason, the FCA has recently proposed some guiding principles to enhance trust in ESG authorised funds and investments and is working to challenge firms before they become ESG authorised.

While these guiding principles are in their early phases, it’s important to note that just because an investment fund doesn’t have an ESG ‘stamp’, it doesn’t necessarily mean that it’s not ethical. It can be difficult to determine what’s under the bonnet of an investment or fund at first glance, so defining what constitutes an ethical fund to you is the first step to ensuring you’re meeting your objectives.

If you’re keen on adding sustainable and ethical investments to your portfolio, we suggest speaking to one of our financial planners. We’ll work with you to understand your objectives in terms of the impact you’d like to have and the environmental, social, and governance factors you’re keen on contributing towards. Once we’ve determined this strategy, we can help you identify suitable ESG funds or portfolios that we trust to meet your objectives so you can feel confident you’re only investing in funds that are ESG approved.

Once you’re set up with ESG investments, you can monitor the impact your investment is having to ensure it continues to meet your values. Although with many investments you’re reliant on the fund/investment manager to report the impact of your investment, this is a space that’s improving quickly. To help you keep track of how your investments are meeting your objectives, the investment manager we work with has a more advanced strategy than most, reporting the impact of your investment by comparing it against the United Nations’ sustainable development goals.

Is ESG investing as fruitful as non-ESG investing?

ESG investments can be just as lucrative as non-ESG investments. However, since this is a relatively new and growing sector, it’s important to be aware that there’s not a long history of investing in this way to evidence claims either way.

In favour of ESG investments, ESG funds saw significant inflows in 2020 as the pandemic had a larger impact on some of the industries and companies that would have naturally scored lower on the ESG criteria, with ESG funds outperforming typical market-based portfolios by quite a margin. However, the future is still slightly uncertain.

It’s also worth noting that your ESG goals may mean your investment options are more limited. This is because you’re overlaying a set of criteria over the universe of investing funds, thus reducing the number of funds available to you that meet your criteria (however this doesn’t necessarily mean your return on investment will decline).

To determine the options available to you, there are a couple of different approaches – negative and positive screening:

• Negative screening – you decide on specific industries or companies that you want to avoid. This tends to lead to a more bespoke approach depending on your needs.
• Positive screening – overlaying an ESG criteria to a selection of funds with an overweighting towards companies with higher ESG ‘scores’. This generally results in a less limiting investment portfolio though it can mean that companies you would expect an ESG portfolio to have avoided may be included.

  For example: If you consider that some of the energy and oil-producing companies, like Shell or BP, have some of the biggest investment budgets for investment into green technologies, it could be argued that investment into these companies has more of an impact than a smaller, but 100% environmentally friendly company.

Managing ESG investments

Ethical/ESG portfolios are no more difficult to manage and administer than traditional portfolios. They can be accessed via investment platforms or in the custodian of a discretionary investment manager, if you’re looking for a more bespoke solution. This bespoke portfolio approach can be useful since you can avoid investing in specific things that don’t meet your definition of ethical investments with the help of your discretionary investment manager.

Other ways to use your wealth to help society

Of course, if you’re not ready to dive into ESG investments and funds, there are other ways you can ensure your money does good for society, for example:

• Charitable gifting
• Saving or receiving loans from ethical banks
• Green savings with NS&I
• Green government bonds
• Earlier stage investments into private limited companies that aim to make an impact (though this can carry a higher risk).

Here to help

To discuss your investment portfolio and ensure your wealth management is meeting your ethical objectives, book an exploratory call with one of our financial planners. We’ll help you identify your objectives, define what ethical investments mean to you, curate and manage your investment portfolio ongoing to ensure we meet your goals as they change.