If you have recently watched the David Attenborough documentary, ‘A Life on Our Planet’, then you may be wondering how you can reduce your carbon footprint. It is tempting to immediately think about changing our diets and travel habits, yet have you considered your investments and pension savings? After all, when you put money into the stock market, it goes into a range of companies which have an impact on our physical environment e.g. oil and gas, aviation and mining.
What if there was a way to make your portfolio more sustainable, ethical and ‘green’? The good news is, 2021 is witnessing rapid growth in ‘ESG investments’ available to retail investors in the developed world, allowing people to bring their portfolios more in line with their principles. Here, in this guide, our financial planners at Vesta Wealth in Cumbria, Teesside and across the North of England, will be sharing some ideas about how to make your pension and investments more sustainable.
ESG investing: an overview
A range of terms are used to describe investments which are more ethical, socially conscious or sustainable. Arguably, the most popular label is ‘ESG’, environmental, social and governance, which refers to investments which seek to provide a positive investment returns whilst minding their impact on the wider world. For instance, companies in an ESG fund may seek to increase female representation on their boards or avoid sourcing their products from factories which use child labour. Environmentally friendly funds, moreover, would likely contain businesses seeking to actively combat climate change (e.g. startups developing renewable energy solutions) or which take meaningful measures to reduce their carbon footprint.
Is my portfolio already sustainable?
By default, many investments are not tilted towards an ESG-focus. Rather, these tend to be invested in funds which either track, or seek to outperform, specific market indexes such as the S&P 500 or FTSE 100. These two, for example, track the 500 and 100 largest companies in the USA and UK, respectively, which includes business from a range of sectors. In the UK, this list includes the likes of Anglo American (metals & mining), BP plc (oil & gas) and Glencore plc (coal). The S&P 500 in the USA, by contrast, is more tech heavy, featuring the likes of Google, Amazon, Microsoft, Apple and Facebook.
The degree to which you deem your portfolio sustainable depends on a few factors, but a key factor is your attitude to ESG strategy. For instance, is a portfolio sustainable if it excludes oil and gas, yet features tobacco companies? Some may argue yes, and others no. Ultimately, it is up to you to decide which investments sit with your principles, and how they should be included in your portfolio. Here, you could pursue a range of options. For instance:
- Screening for exclusion. This is the most radical of the ESG approaches, filtering out all companies and assets from a portfolio which do not actively advance ESG causes.
- Positive vetting. This strategy does not prohibit specific sectors outright, as in the first approach above. Rather, this identifies the best in class within a range of industries and sectors – selecting those which are outperforming their peers on ESG measures. These businesses may not produce goods/services which fight environmental damage (like a wind turbine company), but they set an example for their competitors by ensuring their practices, products and supply lines are constantly reducing harm to the environment.
- Integration. Here, investors take more of a blended approach – incorporating a degree of ESG investments into their portfolios over time, alongside their more traditional ones. For instance, perhaps 5% of the investor’s portfolio comprises ESG funds at first, with an aim to increase this to 20% at a future date.
Am I sacrificing good returns by sustainable investing?
Investors may worry that they cannot achieve the same level of investment growth from an ESG approach, especially if it involves excluding certain sectors. Yet there is mounting evidence that ESG investments can offer returns equal to non-ESG investments, and in some cases surpass them.
Take 2020 as an example. By the end of March (when national lockdowns were being imposed across the world), ESG indices generally performed better in all European markets than those which did not have this focus. One reason for this may be that profits are often higher in ESG companies, which allows them to cope better when a crisis hits.
Invitation
ESG investments are becoming easier to access and growing in popularity in 2021, as businesses across sectors/industries move to meet increasing investor demands.
Be careful not to rush into impulsive decisions which may cost you, leading to regret later. Bear in mind that there are often costs involved with switching funds, such as investment charges and taxes, which will need to be mitigated so that you do not inadvertently harm your wealth.
At Vesta Wealth, we have been advising on ESG portfolios for many years, and we are about to launch our first in house ESG model portfolio, exclusively for our clients. 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
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.