Should I be thinking about sustainable investing?

We understand better the impact of air travel, the consequences of intensive farming, the disparity of workers’ rights around the world, and the human cost of industries like tobacco, gambling and arms dealing. As a result, an increasing number of us are primarily guided by our conscience rather than our pockets when deciding where and how to invest our money.

A survey conducted in the US by The Harris Poll on behalf of Consumer News and Business Channel (CNBC) found that about one-third of millennials often or exclusively use investments that take Environmental, Social and Corporate Governance (ESG) factors into account, compared with 19% of Gen Z, 16% of Gen X and 2% of baby boomers.

That’s a significant proportion of 25 to 40-year-olds investing in greener companies tackling environmental and ethical issues like climate change, carbon neutrality, renewable energies, or businesses that value employee wellbeing, community impact and good governance.

ESG refers to three central factors: environmental, social and governance, used to measure the sustainability and impact upon society of an investment in a company or business. For example:

• Environmental factors can include greenhouse gas emissions, waste management, energy efficiency, air and water pollution and deforestation.
• Social factors can include human rights, labour standards, workplace health and safety, diversity and inclusion.
• Governance factors can include executive pay, internal policies, board member structure, shareholder rights and lobbying.

If you have agreed with your Amber River Financial Planner to take account of ESG factors, he or she will use a screening process that considers a company’s ESG rating before deciding which investments to recommend to you. This will give you the peace of mind that the sustainable and ethical investments we advise on will do measurable good.

Sustainable, or Impact, investing is investing in businesses that have a positive impact on the world. This might be tackling climates change, employee rights or animal welfare. The focus is on investing in companies that are doing their best to help us all thrive in a better world and make a profit.

Ethical investing is generally about avoiding investing in businesses that may harm people and the environment (such as tobacco companies, weapons manufacturers and fossil fuels). It strives to support industries that have a positive impact, such as sustainable energy, to create an investment return.

Other terms used to describe these types of investments are:

• Socially responsible investing (SRI)
• Values-based investing
• Green investing
• Conscious investing

According to the latest Morningstar Sustainability Atlas, Northern European countries lead the pack in sustainable and ethical investing. The Netherlands is the world’s most sustainable stock market, with France overtaking Sweden and Finland for second place in the rankings.

On the flip side, the countries performing poorly in terms of their level of ESG practices include Japan, China and Russia. Russia carries nearly 55% of its market cap in energy stocks and has the world’s highest Carbon Risk Score.

If you believe that investing responsibly means giving up returns, there are in fact, numerous studies, backed up by past performance data (albeit not necessarily a guide to future performance), that show the opposite can be true.

Businesses with strong ESG credentials are, by their nature, future-focused; seeking sustainable and long-term growth. Consumers are happy to pay more for their products and services because they feel good about helping to solve, and not contribute to, the environmental and social problems facing the globe.

Whether you choose to invest in sustainable or traditional funds or a combination of both, it is always best to take the ‘long-term’ view and ensure you have an experienced portfolio manager who is on hand to navigate the various peaks as well as the troughs.

Remember, the value of investments may go down as well as up and you may not get back the amount invested. Levels of income from any investment may fluctuate.