With increasing awareness of environmental, social and governance (ESG) issues, investors and recognising the value of aligning their investments with their ethical beliefs.
We’ll explore the ways in which you can incorporate ESG factors into your investment portfolio.
What is sustainable investing?
Socially responsible investing (SRI) and ESG investing are both examples of sustainable ways to make your money work for you. The goal is to invest in businesses that have a positive impact on society and the environment, while still generating competitive financial returns.
Environmental factors can include a company’s policies and impact on climate change, energy use, pollution, waste management and biodiversity conservation. You might choose green investments if your ethics align with protecting the natural environment.
Social factors relate to a company’s relationships with employees, suppliers, customers and the communities within which it operates, while governance factors examine a company’s leadership, board diversity, executive pay, audits and shareholder rights.
Benefits of sustainable investments
If you’re looking to invest in this way, it’s important to understand the benefits:
- Long-term performance: Businesses with strong sustainable practices tend to be more future-oriented, addressing potential risks such as climate change.
- Risk mitigation: By avoiding companies involved in activities that could be subject to regulation, controversy or long-term environmental risks, investors can protect themselves from potential losses. For example, the fossil fuel sector has faced increasing regulatory pressure as well as unfavourable public opinion.
- Aligning personal values with investments: This type of investing allows individuals to align their financial goals with their personal values.
- Supporting positive change: By directing capital towards companies with strong ESG practices, investors can have a tangible impact on society and the environment.
How to evaluate these investments
One of the simplest ways to do this is by reviewing a company’s ESG rating. Several independent agencies provide scores which assess a company’s performance based on environmental, social and governance factors.
You should also review company reports which outline efforts in areas like carbon emissions reduction, diversity and inclusion and ethical governance.
Beware that some funds may claim to be ESG-focused but still include companies that don’t meet high sustainability standards. This practice is known as “greenwashing” and has led to the Financial Conduct Authority releasing an anti-greenwashing rule for UK businesses.
Incorporating ESG into your portfolio
There are a few ways to get started:
- ESG-focused funds: These can be mutual funds or exchange-traded funds (ETFs) that screen for companies with high scores.
- Thematic investing: This involves focussing on specific themes, such as clean energy, water conservation or social impact. For example, with the government’s commitment to achieving net-zero carbon emissions by 2050, sectors like renewable energy offer significant growth potential.
- Engagement: You might choose to actively engage with companies to encourage better ESG practices. This can involve voting on shareholder proposals or engaging with corporate management.
Whichever area you choose to invest in, it’s clear that sustainable investing is no longer just a trend, it has become an essential consideration for investors looking to build resilient and future-proof portfolios.