ESG Investments

What is sustainable investing?

Sustainable investing is about generating returns that are sustainable into the future.

It involves considering more than just traditional financial analysis though. It is about also paying attention to how nonfinancial factors such as Environmental, Social, and Governance (ESG) considerations may impact an investment’s ability to generate long-term returns. The idea is that those actively preparing themselves for future risks and opportunities by recognising their social and environmental impact will have better long-term prospects than those that do not. Their ability to generate sustainable financial returns should therefore be superior to those that take a shorter-term view.


Why has it become so important?

Social and environmental trends post increasingly significant risks to investments, to a point now where they can no longer be ignored. Moreover, it is increasingly being considered a normal part of fiduciary duty to clients to consider ESG factors. People all over the world are becoming increasingly conscious of acting in the best interests of the environment and society at large. As a result, investors are increasingly looking to invest in a way that reflects these personal values. It is no longer about profits above all else. How a company makes its money is just as important as how much it makes. As a result, investors are demanding more from their investments; more transparent reporting, greater commitment to tackling social and environmental issues, and more concrete evidence of them having done so. 


Is there a trade-off between performance and sustainable investing?

Sustainable investing is not about sacrificing financial returns. The goal is still to make money but in a more responsible, long-term way. While there are other influences (some of which may be outside a company’s control) that will affect how well a company does over time, several academic studies have shown a connection between sustainability factors and improved performance. One study (Friede & Busch 2015) found that companies focused on ESG enjoyed, on average, enhanced financial performance, while analysis by Arabesque Asset Managers and Oxford University show that good sustainability practices positively impact share prices. Morgan Stanley has also done research that shows sustainable funds can help protect investors against downside risk.


Are sustainable funds expensive?

Historically, sustainable funds have been more expensive than their traditional counterparts because they used to be something of a niche area that required specialist skills. But now sustainable options have become more widespread and the skillset more prevalent. Sustainable funds have become more competitively priced compared to traditional funds, and in many cases cost the same as a traditional fund.


Must I avoid ‘sin’ stocks?

This is entirely up to you. With such a wide range of sustainable funds on offer, there is no reason why you should have to invest in a fund that does not completely align with your values and beliefs. If you want to exclude such stocks, you should focus on funds that screen for these types of companies and actively avoid investing in them so that you have nothing to do with them.


Should I avoid fossil fuels given the scale of the global climate challenge?

Again, this is entirely up to you. If investing in such companies is not in line with your beliefs then you can invest in funds that exclude investment in fossil fuels. If you do not want to exclude them entirely but are still worried about the potential investment risks, you can always look at funds with an integrated approach to investing. Here, individual companies or activities are not excluded, but they are held at a weight that reflects their risk. Managers are usually committed to actively engaging with them to improve the sustainability of their business practices and corporate behaviour to mitigate potential risks arising from the negative impact they are having on the environment or society. 


Questions you need to ask yourself as to what type of ESG investor are you? 



Integrated


Want to maximise your investment opportunity set but ensure financial material risks relating to E, S or G issues are taken into account in the investment decision-making process?

Do you have a preference for engagement and encouraging better ESG performance over divestment?


Sustainable


Only want to invest in those companies at the forefront of sustainability practices and stakeholder  management?

Are there specific sustainability themes you would like to gain exposure to/your investments to prioritise?

Are there specific investments or areas of the market you wish to avoid?


 


Screened


Do you have personal values, ethical or religious that you wish to be reflected in your investments?

Are there specific investments or areas of the market you wish to avoid?

Do they wish to exclude companies directly involved in those areas or also those that they are indirectly involved?


Impact


Do you want your investment to deliver a specific, positive, measurable social and/or environmental benefit alongside a financial return?

Is there appetite to potentially invest in private markets to achieve this?



Philanthropy


Are you most focused on maximising your social impact?

Are you willing to donate money to good causes?

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