Sustainable investing has experienced significant growth in recent years as investors increasingly recognise the importance of addressing global challenges. With more information available about the performance of sustainable investments, often outperforming traditional ones, interest has surged.
Climate change and other environmental, social, and corporate governance (ESG) issues are frequently highlighted in the news and through personal experiences. These concerns have heightened awareness about the impact of investments on communities and the planet, bringing sustainable investing into focus.
Despite the growing interest, sustainable investing can be complex, laden with various terms and approaches. This complexity is compounded by the already challenging task of managing personal finances. Additionally, the lack of consensus on terminology, regulatory guidance, and clear-cut investment strategies makes it difficult to define what it means to “invest sustainably.”
Sustainable investing comprises a range of evolving strategies that asset and wealth managers integrate into their processes. Consequently, many investors find themselves navigating this landscape through trial and error, often at a cost, or feeling uncertain about how to begin.
However, there are ways to gain clarity on where to start, how sustainable investing can suit your risk profile and portfolio, and how to align your investments with your personal beliefs.
Sustainable investing aims to achieve competitive financial results and benefits not just for the investor but also for others and the planet. Some may view sustainable investing as a form of activism, but it is fundamentally an investment approach. ESG issues significantly impact investments, and pursuing profits without considering these effects can render investing unsustainable. Sustainable investing involves a conscious effort to minimise negative impacts, drive positive change, and maintain profitability over the long term, recognising that investments are part of a broader context and are affected by sustainability issues.
Investors pushing for companies to commit to net-zero emission targets and address ESG issues encourage a shift towards purpose-driven, stakeholder-centric business models. This shift helps companies pursue sustainable, long-term profitability. Terms like “responsible investing,” “ESG investing,” and “impact investing” are often used interchangeably with sustainable investing. “Responsible investing” dates back to “socially responsible investing” (SRI), while “ESG” describes the specific issues of concern. “Impact” investing highlights the broader effects on people and the planet.
Individual investors are rarely unaffected by ESG issues, as each has personal sustainability concerns that may impact them, their loved ones, or their community. Some learn the hard way when investments encounter undiscovered risks or controversies related to greenwashing.
The rise of information and technology has increased awareness of our systemic impact, influencing more investors to consider sustainability in their investments. The goal remains to improve investments and drive profits, but now with the added motivation of improving the world. Sustainable investing introduces a new dimension for assessing risk and identifying opportunities, aiming to avoid negative outcomes and promote positive ones for people, the planet, and profits.
The assumption that sustainable investing is a unified approach has led to confusion. Instead, it encompasses various strategies that apply a sustainability lens to investments. Everyone’s needs and circumstances differ, as do investment approaches. Identifying activities that minimise negative impacts or advance positive ones can help, and a financial adviser can provide insights into where to start.
To build or review a sustainable portfolio, consider these questions: Are there issuers, companies, or investments to avoid based on their products, industry, or controversies? Are your investments aimed at long-term sustainability, such as renewable energy or clean technology? How well are the companies addressing ESG issues, and are they leading in their sector regarding ESG ratings? Do their products and behaviours align with the UN’s Sustainable Development Goals?
As funds promoting sustainability grow, these themes also support other funds by minimising risks or practising active ownership. Funds with sustainability as a central theme often combine various approaches. Evaluate your exposure to these approaches and target your preferences and profile. Consult a financial adviser for help with your sustainable investing portfolio, whether reviewing current investments or adding those aligned with your goals.
TEAM plc (LON:TEAM) is building a new wealth, asset management and complementary financial services group. With a focus on the UK, Crown Dependencies and International Finance Centres, the strategy is to build local businesses of scale around TEAM’s core skill of providing investment management services.
