We all want our money to go further for us. But given the choice, we’d all probably like our money to work harder for us but at the same time contribute to a greater society.
Sustainable, ethical, and responsible investing is all about this – using your money to make a difference but also generate a positive return. There’s no reason why you can’t go green on two fronts!
Sustainable investing and the changing landscape
The world is changing and attitudes are changing. Over recent years, we have seen the growing importance of tackling key issues such as climate change, reducing the use of plastics, and ensuring businesses are run and governed in ways that benefit society.
As populations and average-life expectations continue to increase, the focus on businesses providing a positive impact on societies in which they operate is understandably drawing more attention.
And your investments have the opportunity to contribute. In April 2020, the Investment Association confirmed within the UK that there were record inflows into responsible investment funds. And this was against a backdrop of a pandemic.
Investors are becoming more aware of the contributions that their money can make to society, to do the world and themselves good.
What is sustainable investing?
There is no fixed definition of sustainable investing. You’ll often hear it interchanged with other words. But one thing is for sure whatever word is used (such as ethical, responsible, impact, or green), sustainable investing is all about making a positive impact on society.
With that said, there are some key principles for differentiation:
- Impact Investing: investments where the benefit or impact to wider society can be measured. This could be related to savings in water usage or more broadly across areas such as renewable energy and affordable housing.
- Ethical Investing: investments that tend to work on the basis of exclusion (or ethical screening) because they have a bad effect on the wider world. Firms that use animal testing, are involved in the gambling industry, or produce tobacco are some of the examples you’ll be familiar with.
- Sustainable Investing: Like the other principles, sustainable investing follows the same principle of investing in businesses that do good for the environment and wider society. You’ll often hear it referred to as some of the aforementioned names. Although when it comes to sustainable investing, there’s usually consideration of environmental, social, and corporate governance activities within the process.
EGScellent – the principles that are changing approaches to investing
The concept of Environmental, Social, and Governance aspects of a company broadens up the definition somewhat. It considers:
- Environmental: the impact a business has on the environments they operate within on areas such as air pollution and climate change.
- Social: consideration as to how a business interacts with internal and external stakeholders including in areas such as charitable engagement, gender equality, and positive working environments for employees.
- Governance: how a business is governed in line with a view to ensuring management acts within the interests of its shareholders rather than its own.
It’s worth noting that if a fund has a focus on ESG then it could still include areas that investors would prefer to exclude such as tobacco. This is because points 2 and 3 in the above may rank well regardless if they operate in an industry that is believed to do harm to the environment.
Let’s get practical: your options for sustainable or responsible investing
Now, you could invest directly in shares of companies that you believe to be sound from a responsible perspective. This would require looking not only at the sector itself but doing a great deal of research yourself to truly understand the workings of a company (balanced against your desired returns).
Investing in funds offers a potentially easier way for responsible investing, and here we’ll look at a few practical examples.
Passive Funds & the FTSE4Good Index Series
Established in 2001, The FTSE4Good Index Series has a focus on ESG principles and avoids investing in sectors such as weapons and tobacco – capturing a broad range of global businesses that are showing positive applications of ESG. Passive funds can track an index such as this and ease the burden on you.
As a series, there are also other variants to the FTSE4Good index including FTSE4Good Emerging Index – with the latter covering 20 emerging market countries.
Active Funds: Responsible Funds, Ethical Funds, Sustainable Funds, ESG Funds…
When it comes to active funds, you will often see various choices for responsible investment funds (sometimes called ethical funds, sustainable funds, or ESG funds). The best way to understand the options is to take a closer look at some of them via their fact sheets:
- Fidelity Sustainable Water and Waste Fund – described as an ESG fund that provides exposure to under-researched water and waste management sectors. Its investment policy is to invest at least 60% in shares of sustainable water and waste companies globally. Some of its include American Water Works Co and Veolia – a company focused on water, waste management, and energy that aims to ‘contribute to the sustainable development of industries and communities’.
- Triodos Global Equities Impact Fund – described as a global impact fund that invests in a diversified range of large listed companies that are selected for their sustainability as well as financial performance. Holdings include Danone as well as Roche Holding – a multinational healthcare company ‘committed to improving lives’.
- Kames Ethical Cautious Managed Fund – described as a fund that integrates an ethical screening process which means it doesn’t invest in certain sectors. Some of its biggest holdings are in RELX as well as GB Group – a company that helps organisations with identity management and fraud prevention.
- Schroders – recognising the importance of ESG and responsible investment, Schroders has committed to integrating these principles into all of its investments by 2020.
Regardless of the naming convention (Sustainable, Ethical, or Impact), you will see they all have one thing in common; their top holdings are generally representative of companies that seek to positively contribute to society.
Going Green on Two-Fronts
Your first instinct is probably that responsible investing will mean reduced returns. But this is not true. Looking at the above, you will see you can still invest in many big-name companies, but ones that are contributing to society and the environment we all live in. Data is also showing that ESG investing can outperform its less societal-aware peers.
Let’s think about the basics of investing, it’s about investing for the long term (a minimum of 5 years). Investing is not about the short-term and neither is a business.
A business must be able to adapt and harness changes in consumer attitudes and the environmental landscape – without doing so, it will eventually fall behind the rest. There is logic in the fact that these firms have a greater chance of seeing their value increase. Look at BP, it’s new strategy is focused on renewable energy. Firms must adapt to survive.
Given the increased choice, it’s easy to see why you may choose to go green on two fronts – increasing your returns but content in the knowledge that you are supporting businesses that are helping to support a better world, for now, and for the future.
What investor wouldn’t want that?