The No-Nonsense Guide to Sustainable Investing: What You Need to Know
Want to make money and do good at the same time? Welcome to sustainable investing. This no-nonsense guide covers the essentials - from ESG to SRI to impact investing. Learn how to spot greenwashing, manage higher fees, and align your portfolio with your values, without the faff.
What is sustainable investing?
The basic idea behind sustainable investing is to find investments that don't just chase profits, but also consider their social and environmental responsibilities. It's about finding companies that are trying to be a force for good, not just making a quick buck.
Think of it as being picky about where your money goes, just like you might be picky about where your food comes from.
Sustainable investing comes in many flavours. You might hear people call it “ESG investing”, “ethical investing”, “responsible investing” or even “green investing”. Same overarching idea, but some subtle differences which we’ll cover later in this guide.
How does sustainable investing work?
When putting money into a sustainable investment stock or fund, you might be looking for companies that tick certain boxes. For example, some common areas of interest for sustainable investors are:
Three main approaches to sustainable investing
💯 ESG investing
ESG investing focuses on a company's Environmental (how they treat the planet), Social (how they treat people), and Governance (how they run their business) practices.
It considers factors beyond just financial performance, such as the company's environmental footprint, treatment of workers, and corporate leadership. The goal is to invest in companies that are responsibly managing their impact on the world.
Think of it as a company report card for being decent. Some companies ace all three, others... not so much!
ESG investing has a wide remit. One that can be, if not carefully managed, too much of a ‘jack of all trades’!
Investing in businesses that not only consider their environmental impact, that are socially responsible, whilst simultaneously integrating great governance throughout, definitely appeals to my clients, and if done well can form the backbone of a decent investment strategy. But the occasional need for compromise by investing in a business which is strong in one ESG area but weak in another can sometimes result in questionable investments being made.
Would you want an investment in a green business that exploits its workers, for example? We still welcome and promote ESG funds, but they frequently need the most attention to make sure they remain right for our clients.
🚫 SRI investing
SRI – or Socially Responsible Investing – is a method of sustainable investing which involves cutting out certain companies and sectors. A bit like having a “naughty list” of firms that won’t get your money.
This could mean excluding sectors like weapons, tobacco or fossil fuels. The aim is to build an investment portfolio that reflects the investor's personal beliefs and principles, not just maximise returns.
It’s typically stricter than ESG investing and can mean missing out on some profitable sectors, such as energy. It could be a good fit for you if you have strong principles about certain industries and don’t mind missing out on potentially lucrative investments to stick to what you believe in.
The clue to Socially Responsible Investing is in the name: this was borne from a desire to avoid entities that harmed people and society long before environmental impacts were considered or even realised.
It has roots that go back centuries, and has evolved from avoiding people exploitation and harm (slavery, tobacco and weapons, for example) to nowadays encompassing positive traits, so perhaps social housing investment or community consideration.
At Good Green Money, SRI investing often attracts medical professionals who are, understandably, very people-oriented: they in particular see the merits of this type of investing.
🌱 Impact investing
Impact investing is similar to ESG investing but with a specific focus on achieving measurable social and environmental benefits while also generating financial returns.
The goal is to direct capital towards solutions that address global challenges, such as affordable housing, renewable energy, healthcare innovation or education technology. This way, impact investors channel their money into projects which are both positive and profitable.
Impact investing tends to be more focused on specific, trackable goals, but can be seen as a riskier investment strategy as it can involve exposure to newer, less-established industries.
Impact investing is a relatively new phenomenon, and could be viewed as a purer, more hard-hitting derivative of wider ethical investing approaches. Investee businesses can’t just avoid certain areas or merely balance their regular practices with social and environmental considerations - they have to do more. There has to be defined, measurable positive impacts at play.
ESG vs SRI vs Impact
Approach | ESG investing | SRI investing | Impact investing |
Focus | Evaluates companies based on environmental, social, and governance criteria | Actively avoids investing in certain industries or companies based on ethical standards | Targets investments that generate measurable social and environmental benefits |
Financial Objectives | Competitive returns + ESG | May sacrifice returns to uphold values | Impact primary, returns secondary |
Investment Universe | Broad public companies | Narrower universe | Mix of public and private |
Impact Measurement | Measures against ESG metrics | Difficult to measure | Rigorous impact tracking |
Risk Profile | Similar to conventional | Higher risk due to exclusions | Higher risk, exposed to new industries |
Three facts about sustainable investing
1. Sustainable funds have underperformed the market in recent years
Sustainable funds lagged their conventional peers in total returns in 2024, with Morgan Stanley reporting median returns of just 0.4% in H2, compared to traditional funds’ 1.7%.[1] However, the same report emphasises that sustainable funds actually drummed up better returns over a longer period:
Over a longer period, sustainable funds have outperformed traditional funds. Institute analysis of Morningstar data found that investing a hypothetical $100 into a sustainable fund in December 2018 would equate to $136 today, while investing $100 into a traditional fund over the same period would equate to $131 today.
2. Companies with good ESG scores often have lower borrowing costs
This is because as the Governance standard - one of the main pillars of ESG - is “known to reduce a firm's default risk, which directly impacts its cost of debt”.[2]
3. Sustainable products are growing in popularity
Sustainable investing has grown in popularity over the last decade and has remained attractive even in the face of a tough economic environment. A 2024 survey by PwC found that consumers “are willing to spend an average of 9.7% more on sustainably produced or sourced goods, even as cost-of-living and inflationary concerns weigh”. [3]
Can you make money investing sustainably?
Let's tackle the elephant in the room - returns.
The short answer:
You can. But just like any way, shape or form of investing, your capital is not guaranteed, and you could end up losing money as well as making it. Sustainable investing is no different.
The longer answer:
Many sustainable stocks and funds perform just as well as traditional ones. Some even do better. Think about it - companies that plan for climate change and treat their workers well are often better prepared for the future. They're less likely to get hit with massive fines or face worker strikes.
Once upon a time, investing 'sustainably' used to mean we’d typically make a bit less money. Back in the 1980s, oil and cigarette firms were powerful money-making machines. However today it’s a different story.
Although short-term political events cause havoc with oil prices (we’re talking Russia’s invasion of the Ukraine here, for example), if we look longer-term, there is a wall of policy-fuelled money backing climate transition.
Large companies have seen the risks of treating workforces poorly, and shoddy corporate governance has brought down some major companies. So ESG-factors are powerful financial drivers.
Equally, sustainable stocks or funds can actually leave you more vulnerable to price volatility, as they may have exposure to younger, less established companies or ones operating in less developed countries. It really depends on exactly what you’re investing in.
Sustainable vs non-sustainable equities performance
The graph below shows the performance of a single £1,000 investment in a global sustainable-focused equity index compared to a comparable non-sustainable equity index - the MSCI ACWI Sustainable Development versus the MSCI ACWI - from 2020 to present.
Source: FE FundInfo. Correct as at June 2025.
What to watch out for with sustainable investing
Sustainable investing is still a developing area and for many will be a new or unfamiliar concept. There are some things worth bearing in mind if it’s your first time incorporating a little green into your portfolio, so here are two issues to be aware of:
🚩 Greenwashing
“Greenwashing” is the term given to when companies pretend to be more sustainable or ethical than they really are. Like putting a plant on your logo and calling yourself eco-friendly with nothing to back up your claim.
This can be a big concern if you’re passionate about matching your money to your morals. In fact, Boring Money’s Sustainable Investing Report 2024 found that greenwashing was the top barrier to sustainable investing for over 20% of UK investors.[4]
Spotting a company that’s genuinely greenwashing is easier said than done, however. And there are two different types - intentional and unintentional - Morningstar’s Global Head of Sustainability Research Hortense Bioy explains.
There is intentional greenwashing, which is when asset managers over-claim and over-sell what they’re actually providing. And this type of greenwashing is clearly problematic, and corrosive to long-term trust and credibility.
And there is another form of greenwashing that often comes down to an expectations gap between investors and asset managers. So, here, there is no real intention from the asset manager to over-state the green characteristics of a product, but the investor expects more – because there is no common definition of “green”, the investor has a certain idea of what green should look like - without realising sometimes that it is not practical or in his best interest.[5]
So what can an investor do to make sure they aren’t being misled – intentionally or otherwise?
However, Boiy explains that the best thing an aspiring sustainable investor can do to mitigate greenwashing is to educate themselves and make sure they’re clued up on exactly where their money is going.
To spot greenwashing and avoid it, due diligence is key. First, an investor needs to look beyond a fund’s name or label and understand what the fund’s objective is: What does the fund aim to do? Is it a fund that aims to invest in companies with lower ESG risk? Does it aim to invest in companies that offer solutions to the world’s biggest challenges? Does the fund claim to have some sort of impact?
Then, the fund’s claims need to be tested. An investor needs to look under the hood, look at the fund’s holdings and their ESG characteristics. Many funds with a climate theme don’t actually invest only in green companies. They may invest in so-called “transition” companies. These are companies that today don’t necessarily have good green credentials, they may even have exposure to fossil fuels, but these companies have the intention and plans to improve their environmental profile. An investor must feel comfortable with this type of companies.[6]
Morningstar and other research organisations publish ESG and sustainability metrics which can be helpful for those who want to dig under the bonnet of their investments. Morningstar’s Sustainability Ratings can be a good place to start – you can read about how these work and how you can find them at the link below.
🚩 Higher fees
Greenwashing aside, there is also the possibility that you could end up paying more in fees for sustainable funds. This is because some charge more for all the extra research and management that goes into ensuring your investments really are what they say they are.
Here are some examples of the cost of investing in sustainable investment funds on popular investment platforms versus a traditional alternative:
Platform | AJ Bell | Nutmeg | Wealthify |
Sustainable Option | 0.45% (Responsible Growth) | 0.23% (Socially responsible investing) | 0.70% (Ethical) |
Traditional Option | 0.31% (Adventurous) | 0.16% (Fixed allocation) | 0.16% (Original) |
Correct as at June 2025. Note that these are fund charges only and there are additional costs such as platform and trading fees.
If you’re thinking about investing in sustainable funds, or you already do but you’re curious about the cost, make sure you do your homework. Look for the ‘OCF’ (Ongoing Charges Figure) - this is how much it costs to hold the fund over the course of a year.
You may find that it works out a little more expensive than a non-sustainable fund. This might not be a make-or-break thing for you; Ultimately it comes down to how important you see cost compared to aligning your investments with your personal values. For some, paying extra for a sustainable fund is a sacrifice you’re willing to make. Others may not feel the same.
Final thoughts
All in all, sustainable investing isn't just for tree-huggers! It's becoming a sensible option for anyone who wants to invest their money while also putting it behind causes that resonate with them. Just remember: All investing carries risk. Don't invest money you can't afford to lose, and never feel pressured to invest in something you don't understand - sustainable or not! Your money, your values, your choice. Just make sure you do your homework first.
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[1] Morgan Stanley, March 2025
[3] PwC, May 2024