There are a multitude of investment solutions that are available in the market and there is no such thing as a perfect solution. However, I believe the key criteria to experience a successful investment journey are to keep costs as low as possible and to be globally diversified across high quality liquid funds.
Within some investment portfolios, it is difficult to know the exact identity of the underlying companies and sectors that make up a portfolio, as there are likely to be thousands of them. Because of this, there will be an allocation to companies that are likely to have a negative impact on the environment and society in general. For example, this may include exposure to companies involved in the extraction and production of fossil fuels or the manufacture of armaments.
Interest in investing in a more sustainable way has increased over the last few years and is becoming more mainstream and accessible. Importantly, it does not mean sacrificing investment returns. In fact, there is increasing evidence that companies which operate in a more sustainable way outperform companies which don’t, both in rising and falling markets.
The concept of ‘investing sustainably’ can mean many different things and can be somewhat confusing and complexed. In short, it is about investing in companies with business practices that are capable of being continued indefinitely without causing harm to current or future generations, or exhausting natural resources.
I think it is helpful to look at sustainable investing as an “umbrella” under which there are three separate categories – Ethical Screening, ESG Investing and Positive Impact Investing – each with increasing levels of ‘sustainability.’ At one end of the spectrum is a conventional investment where no consideration is taken to the sustainability of the underlying companies within a portfolio, and at the other end sits philanthropy.
A word of explanation on each may be helpful.
A conventional investment can include any company, industry, or sector. It can be managed on an active basis (where a manager is trying to beat the market) or passive basis (following the movement of an index) and include an evidence based approach.
Ethical screening excludes companies that operate in controversial activities and are likely to cause a harmful effect on the planet and society. Such companies are likely to fail to reach a minimum ‘sustainable’ criteria and are deemed to be the least responsible companies within their sector.
ESG investing builds on the exclusion of controversial business areas and gives greater weighting to companies with more sustainable business practices. ESG stands for the following:
Environmental; how companies interact with the environment.
Social; how companies interact with their employees, communities and customers.
Governance; how companies are run.
All three pillars combine to define what most people would regard as good business practice. Companies operating in controversial sectors (for example oil companies) may be included within the ESG category if they have better scores when compared to other companies in the same sector i.e. they may be the least bad!
The aim of ESG investing is to create an investment portfolio which is made up of ‘best in class’ companies which score well against a range of factors taking into account their environmental, social, and governance credentials. In short, the aim is to target companies which are the most responsible and well run.
Impact Investing moves a step further beyond ESG investing and invests in companies which aim to deliver a positive or beneficial impact to the planet and society, while still seeking a financial return. This takes a more holistic view and requires more active management with fewer companies in a portfolio. Importantly, positive social or environmental impacts are actively measured and reported.
Philanthropy lies at the extreme beyond impact investing where the sole aim is to ‘do good’ in the world aligned to chosen interests and areas, without the expectation of any financial or monetary return from the investment (donation).
As to whether there is a desire to invest in a more sustainable way depends on your specific preferences and views. That could range from having no desire at all, to dipping your toe in the water and being at least ‘somewhat green’, or moving further along the spectrum and having a significant proportion (or all) of your investments in a sustainable solution. There are many factors to be considered.
Sustainable investing is an evolving area and one which is growing in awareness and popularity. I believe that companies with more sustainable business practices are likely to perform better, which in turn should help to reduce risk and deliver both financial and non-financial benefits.