Sustainable investing is an investing strategy which balances long-term financial returns with positive environmental or social outcomes. It is about investing for purpose and profits.
It has become an increasingly popular investment strategy in recent years, in particular amongst women. With a growing awareness of the climate emergency investors see the need to move finance and capital into businesses that consider, address and solve this problem.
In this blog post we’ll discuss the benefits of investing sustainably, the different ways of doing it and how to start.
WHY SHOULD YOU CHOOSE SUSTAINABLE INVESTING?
Less Uncertainty
One of the primary benefits of sustainable investing is the potential to lower risk.
The rising temperature of our planet is having an effect on the weather systems of the world and we are seeing the impact of this across our planet. A company or investment product that takes this on board is simply being a responsible business or product. To ignore this is a business and financial risk. To take it on board as a factor is about mitigating this risk.
Positive Social Impact
Sustainable investing also has the potential to make a positive social impact. It is an effective way to create social and environmental change. By investing in companies that adhere to social and environmental standards, you can directly support causes you care about. Whether it’s investing in renewable energy projects or companies that promote gender equality, sustainable investments offer a way to make a difference in the world.
It is something you CAN do!
It is easy to feel overwhelmed by the scale of the problems facing our planet. Choosing to invest sustainably means you can make a difference with your money, probably more than you think. According to Make My Money Matter, greening your pension is 21 times more effective at cutting carbon than stopping flying, going veggie and switching energy supplier combined.
DIFFERENT TYPES OF SUSTAINABLE INVESTING
There are 3 main ways of investing sustainably, which differ in terms of their financial goals and the difference they are aiming to make.
Responsible Investing
This type of investing avoids destructive businesses which don’t look after people, planet or processes. In the early years of ‘ethical’ investing this would mean avoiding investing in companies based in South Africa during apartheid. Now it is about screening out so called sin stocks. These are shares in companies involved in activities that are considered unethical, such as alcohol, tobacco, gambling, adult entertainment or weapons.
Sustainable or ESG Investing
This is a broad approach to investing where you include companies that are taking positive steps to challenge and address planetary problems. These can range from companies focusing on renewable energy to those working towards a more equitable economic system. ESG refers to the environmental, social, and governance practices of an investment that may have an impact on it’s performance. What is is their environmental footprint? How do they impact society? And how is the company governed? The ‘ESG’ factors tell you if a company is morally worth investing in and also indicates how risky the company is from a financial perspective.
Impact Driven
Impact investing is a type of sustainable investing that aims to generate financial returns while also making a positive impact on society and the environment. You are investing in possible solutions to create a more just and sustainable world. This could be fighting climate change, preserving natural resources or providing opportunities for under-represented populations.
These terms (and more!) can be used interchangeably and confusingly to describe sustainable investing. This simple diagram shows the different types of sustainable investing in a clear and understandable way.
HOW TO GET STARTED
When it comes to sustainable investing, knowing where to start can be both intimidating and overwhelming.
The most important first step, however, is to be clear about your focus. If there is something you feel strongly about it makes it simpler to work out what you want to invest in, or what you want to avoid. This focus will be different for everyone.
A client of mine, for example, lost her father to lung cancer due to smoking. She was adamant she was was not investing in any companies related to tobacco production. I have a friend who wants nothing to do with palm oil because of the deforestation that has occurred from the plantations. For me what is important is avoiding companies involved in fossil fuel exploration and production.
Making investment choices based on what we feel strongly about may affect your returns. Tobacco companies for example traditionally pay good dividends. By avoiding any fossil fuel companies I have not benefitted from the $200 billion profit the top 5 oil companies made in 2022. However, this is not personally the way I want to be making a financial gain. It is about my integrity as an investor.
When you are clear about your values you can then narrow your search for investments and choose an approach:
- Do you want to exclude certain types of business altogether? (responsible investing)
- Would you prefer to invest in problematic companies in order to improve them? (sustainable investing)
- Or do you want your money invested in finding solutions? (impact investing)
It is important to still remember the simple principles of successful investing when investing sustainably. You always want to invest in a range of different things, rather than put all your money into the latest hottest company promising to solve the world’s problems.
SUSTAINABLE INVESTING FOR GOOD
‘Put your money where you want the world to go. It is as simple and as powerful as that.’
Christiana Figueres – Former Executive Secretary, United Nations Framework Convention on Climate Change
In the future the terms sustainable and traditional investing may no longer be used. Financial decisions will hopefully consider the the long-term health of a company and it’s impact on the planet rather than only short-term financial gains.
The world is changing, and so are our investments. Sustainable investing is an important tool that can be used to create a better future for both our portfolios and the planet.
While it’s not yet clear whether sustainable investing gives better financial returns or not, investing in this way is important for investors who want to lower their risk, make a positive social impact and invest in alignment with their values.
In future blogs we will be looking at where to invest sustainably, greening your pension and choosing sustainable funds, so make sure you don’t miss them!
Or get going with sustainable investing yourself with an online Investing Taster Class, Girls Just Want to Have Green Funds for £35.
If you enjoyed this article, you might also enjoy The Gender Gap And How To Bridge it.