How can you put your investments towards a good cause? Increasingly, investors are seeking to maximise their financial goals (e.g. building wealth) while also seeking to make a positive difference to the planet. In this guide, our Carlisle financial planners at Vesta Wealth explain how this can be achieved in 2024-25 via “sustainable investing”.
We hope these insights are helpful. Please contact us for more information about sustainable investing, or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
What is sustainable investing?
Traditionally, investing has primarily been concerned with wealth growth and preservation. For instance, a long-term investor might focus on the former to build the best possible retirement fund. A retired person, by contrast, might switch concentration to wealth preservation (i.e. drawing an income from her investments without eroding the pot too much).
Sustainable investing can be integrated with both of these traditional approaches. The difference is that investments are selected not just to achieve diversification and optimal returns, but also to generate measurable and positive change on “non-financial metrics”. For example in areas such as environmental preservation, promoting social equality, and better governance.
These three areas are often classed into a catch-all term called “ESG investing” (environmental, social, and governance). Sometimes other phrases are also used, such as socially responsible investing and impact investing.
Why “ESG” investing?
Arguably, ethical considerations have been included in investment decisions since at least the 19th Century. In the USA, Quakers and Methodists sometimes evaluated issues such as temperance and fair employment conditions before investing in an asset.
Today, however, sustainable investing and its various “family members” (e.g., green investing, impact investing, etc.) are no longer “fringe” considerations. They have become very mainstream, especially among younger and socially conscious demographics.
The terminology can be confusing. Often, phrases like “sustainable investing”, “ESG” and “green investing” are used interchangeably. However, there can be subtle differences. For instance, green investing is typically more focused on the “E” part of the ESG equation. By contrast, ESG and sustainable investing might seek to accommodate a wider range of investor values, such as boardroom gender equality.
Some common myths busted
There are at least three common misconceptions about sustainable investing. One of these is that all ‘ESG’, ‘Sustainable, or ‘Ethical’ investments are what they claim they are. This is not the case. With the rising popularity and interest from investors in these areas, it has been quite common to see companies attempt to ‘cash in’ and simply rename an existing investment as ‘sustainable’ while making no changes to the underlying investments or management. This is known as greenwashing. As such, it is important to check the underlying investments of a fund to see if it can justify the label and ensure it aligns with your views. A financial adviser can assist with this.
A second misconception is that sustainable investing leads to lower returns. The assumption seems to be that there is a necessary “trade-off” between investment performance and sustainability. However, the evidence suggests ESG funds have comparable results to their non-ESG equivalents.
The third misconception argues that sustainable investing is a “fad” which will soon disappear, leaving investors hanging out to dry. This likely stems from widespread misunderstandings. By 2026, institutional investment into ESG-focused assets is projected to reach 21.5% of total world assets under management (AUM) by 2026. This forecast growth is faster than the asset and wealth management (AWM) industry as a whole.
Getting started with sustainable investing
Building a sustainable set of investments looks different for everyone. Each client has unique financial goals, circumstances and vales which factor into their portfolio decision-making. Broadly speaking, there are at least five approaches which an investor can adopt:
- Traditional investing. In short, investments are purely selected based on financial considerations and ESG variables are largely ignored.
- Responsible investing. This approach is mostly concerned with “harm limitation”. For instance, certain industries may be avoided during portfolio construction (e.g. tobacco or weapons companies) due to ethical or religious reasons.
- Sustainable investing. Here, investments are partly selected to maximise positive outcomes for various ethical causes – not just limit damage by avoiding certain investments which produce negative externalities.
- Solution focused. This investment strategy is often tied to the attainment of specific objectives, such as the UN Sustainable Development Goals (SDG). One benefit of this approach is that investments and projects can be more “measurable”, helping investors to track ethical and financial performance simultaneously.
- Philanthropy. Here, the investor deliberately sacrifices the potential for achieving higher returns in exchange for creating a greater positive impact on the planet or society.
Conclusion & invitation
Sustainable investing can be an exciting way to create a deeper sense of purpose with your investments. Not only are you working towards meaningful personal goals (e.g. achieving a comfortable retirement and a strong financial legacy), but you can also connect your portfolio with your values and become part of something bigger than yourself.
There is no single “correct” way to approach sustainable investing. What works for you may not be appropriate for others, and vice versa. What matters is that your portfolio reflects your specific needs, priorities, risk tolerance, investment horizon and goals.
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.