Balancing profit with principle

The growth of sustainable investment gives people many different ways to save and invest according to their values. But you may need help navigating a complex area.

Are you interested in doing good with your savings and investments, as well as doing well? If so, you’re not alone: in recent years, there has been a huge increase in the number of people who are determined to invest their money in a way that reflects their moral and ethical views. They don’t want to sacrifice investment performance, but they do want to invest in line with their values.

The investment industry continues to develop new products and services accordingly. Ethical funds, first launched more than 40 years ago, now look rather limited. These funds employed negative screens to identify companies that the manager would never hold in the portfolio – arms manufacturers, say, or tobacco producers. Today’s funds are more sophisticated; they still use some negative screening techniques, but they’re also actively looking for companies that make a positive impact or display high standards.

ESG explained

Three areas dominate the debate: the spotlight is on environmental, social and governance issues – or ESG for short. ESG-focused funds avoid most businesses falling short in these areas, but also try to use their influence to encourage better behaviours – to be a force for good. Fund managers will engage with businesses, supporting them as they improve their practices. That might include work to reduce carbon emissions, a focus on an issue such as modern slavery, or even enhancements in areas such as shareholder accountability and boardroom diversity.

The goal of these modern funds is to drive stronger ESG performance throughout the economy. Fund managers also have the option of selling their stakes in companies that don’t improve their practices – and even naming and shaming the worst offenders.

There is also a growing emphasis on calling out “greenwashing”, where businesses seek to promote their brands by claiming they are performing more strongly on ESG issues than is actually the case. Examples range from oil companies that talk up their renewable energy projects while still making huge profits from fossil fuels to consumer products companies making only token efforts to move away from single-use plastic.

Towards sustainable investment

This new style of investing with principle is often described as “sustainable investment”. It’s a broad term, but most sustainable investment funds employ both negative screening, avoiding companies involved in certain activities, and positive screening, seeking out businesses that make a positive impact or are improving their ESG performance.

For investors, this nuanced approach offers plenty of choice, but it can also cause confusion. In practice, different sustainable investment funds will have very different approaches. Some may be much tougher with negative screens than others. Some may be more focused on one issue – climate change, for example – than another concern. Some may concentrate on engagement, investing in companies that other funds would avoid in order to try to influence change.

Your choice of fund will therefore partly depend on your own views. If social issues are particularly important to you, say, you may be determined to avoid exposure to countries with particularly poor human rights records – China, for example. But if it’s the environment that really matters to you, Chinese exposure may be appealing, given how much the country is investing in decarbonisation.

Similarly, if you simply want nothing to do with the fossil fuel industry, a fund that screens out all oil and gas companies may appeal. If you think your money can drive change, you may want a fund that seeks to engage with these businesses.

There is also the question of investment performance to consider. Some investors see doing good as more important than doing well; they may be more interested in “impact funds” where performance is measured in terms of social and environmental objectives, as well as by financial return. For others, the income and growth that the investment generates will remain of paramount importance.

The investment case for ESG

Indeed, while sustainable investment funds have a good medium to long-term performance record, the past couple of years has been tough. Soaring energy prices have seen shares in companies such as oil and gas producers rise sharply, but most sustainable funds have missed out on these gains. Equally, the technology sector, where many sustainable funds have significant exposure, has underperformed in the face of high inflation and rising interest rates.

Nevertheless, supporters of sustainable investment insist that the long-term prospects for these funds are strong. They point out, for example, that as companies come under more pressure to help mitigate climate change, laggards can expect to face higher taxes, more regulation and other penalties, which will hit their performance. Investors with exposure to better performers will therefore be at an advantage.

The global focus on the environment underlines the point. December’s COP 28 meeting, a summit of influential leaders from government, business, finance and the sustainability community, will once again concentrate international attention on climate change.

Meanwhile, regulation governing sustainable funds also continues to evolve, which should help investors make better-informed decisions. In the UK, the Government is currently consulting on a “green taxonomy”, which will define key terms and characteristics so that all parties can be more transparent. The Financial Conduct Authority is shortly due to publish its final Sustainability Disclosure Rules, which will set out how sustainable funds should be categorised and what information they should have to give investors.

With so much happening, many investors will need support as they look to put their principles into practice. In the pursuit of its core business, financial provision and advice. 

Chase de Vere itself has many specialist advisers with real expertise in sustainable investment – they include Rachel Sartin, who has just won “Woman of The Year, ESG Advice”, at the Women in Financial Awards 2023. We look forward to hearing about your views, and we can help you incorporate them into your investment approach.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

Content correct at time of writing.

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