Sustainable & ESG investing guide
In a nutshell
Naming can confuse – other options include responsible, green, impact, SRI or ethical (phew!)
'ESG' stands for Environment, Social and Governance
Many sustainable funds (investment ready-meals) are available
Fees can be a little higher – managers say this is for closer monitoring of companies (hmmm...)
Emerging evidence suggests that sustainable investing shouldn't mean sacrificing any profits
At the heart of it, sustainable investing (or responsible investing) is choosing to use your savings to support businesses and investments which are well-positioned to thrive in the future. Broadly speaking this means avoiding destructive businesses which don’t look after people, planet or process properly; and actively backing those which will benefit from changing trends and developments.
This is not the same as charitable behaviour – this is a story of both purpose and profits. As well as achieving particular sustainability outcomes (like shifting to renewable energy), and supporting your values and beliefs (like gender equality), the aim is also to maximise your long-term returns. This is done by challenging companies to identify and manage environmental, social and governance (ESG) risks and opportunities deemed to have an impact on their long-term future.
This is also not a niche thing – not anymore. According to the FT, in 2013 less than $2 trillion was invested sustainably. By 2019 this had rocketed to a total of more than $31 trillion. Now around 25% of all funds consider sustainability.
74% say it's important to actively consider ESG factors.
17 Sustainability Goals
What kind of positive outcomes could your money actually support?
The UN has published 17 Sustainable Development Goals (SDGs) as a “blueprint to achieve a better and more sustainable future for all”. Many investment managers position their sustainable and ESG products in relation to these goals, so it’s fairly simple to get a quick idea of the positive outcomes you’re supporting.
Goals include: no poverty, quality education, reducing inequality, climate action, responsible consumption, life below water and so on. See infographics on each SDG.
Growing Your Money
It’s a common misconception that to invest sustainably you need to sacrifice a portion of your returns. Not true! In fact, many sustainable funds have been outperforming their non-sustainable counterparts.
Of the 56 sustainable funds monitored by industry research group Morningstar, 41 have outperformed their non-sustainable equivalents over 3 years – that means sustainable investing has come out on top 73% of the time.
As ever, past performance doesn’t guarantee anything going forward. But investment firms are showing their confidence in these numbers - Goldman Sachs has even announced plans to spend $750 billion over the next decade "investing in, financing and advising companies" in this space. Blimey!
Having A Positive Impact
It’s easy to see if your investments are making money – just check your account balances – but how can you look into your sustainable impact? Trust is one thing, but we also want proof!
Investment platforms and financial advisers have differing methods to quantify it, and you can read more about that in this article, but here’s an example.
WHEB Group, who exclusively manage sustainable investments, calculate that their clients’ combined investments in 2018 have, among other things:
Generated 464,000 MWh of renewable energy
Treated 2.6 billion litres of wastewater
Provided 12,800 people with healthcare treatment
Provided 29,000 days of higher education
QUICK START GUIDE
1. Read our 5-minute intro to investing
Find out how different types of investment work, how to save on tax with an ISA account, what the timeframes are, whether it’s suitable for you, and why it doesn’t need to be scary or confusing.
2. Choose where to buy your investments
Compare investment platforms and robo advisers (services that let you buy investments online) based on simplicity, fees, customer reviews and sustainable options.
+ Scroll down to ‘Help me choose’ for more
Sustainable investing has many alter egos and close cousins. Some investment providers and financial advisors call it 'sustainable', others will talk to you about ‘responsible investing’, and others will refer to ‘ESG investing’. These 3 terms are being used pretty much interchangeably, so if you see an investment with one of these labels you should be on the right track. However, they each refer to different parts of the investment process, so it's worth knowing what each means.
This refers to the inputs that make up a fund manager's analysis when judging if a company should be classed as a sustainable investment.
Stands for 'Environmental, Social and Governance' - more on what those mean in a moment.
This refers to the outcomes your investments are hoping to achieve:
Sustainable long-term returns for you - i.e. investing in businesses that will stand the test of time, grow and pay out well.
Sustainable influence on the planet and its populations, based on the 17 goals set out by the United Nations (the ones in the colourful squares above)
This refers to the general behaviour of investors and investment managers.
For investors, it does what it says on the tin. If you invest this way, you're acting responsibly.
For investment managers, it means acting as a 'steward' who creates long-term value for clients and sustainable benefits for the economy, environment and society.
A closer look at the E, S and G
E: What is their Environmental footprint – does the company or their suppliers pollute the oceans and kill off orangutans, or do they create renewable energy and cleaner water?
S: How do they impact Society – does the company or their suppliers employ children and ignore human rights, or do they support the local community and improve quality of life?
G: How is the company Governed – is the board of executives a band of overpaid bros led by an oppressive megalomaniac, or are there sensible procedures to safeguard profits and people?
These ‘ESG’ factors don’t just tell you if a company is morally worth investing in; they also give a hint as to how risky the company is from a purely financial perspective.
Times are changing, so if a company’s income relies on manufacturing products that will eventually be banned (like petrol cars by 2040), or on an employment practice that new generations won’t stand for (like zero-hours contracts), then that company might not be around anymore when you come to collect. That’s why ESG criteria are important – they identify risks so the people who run your investment funds (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/funds/) can take action, either by helping the company to change or choosing not to invest at all.
What's in a name?
Now for the close cousins of sustainable investing. The following terms are ones you might also see when seeking to do good with your money:
Green investing: focus is on conserving natural resources, producing alternative energy or generally keeping the environment tip-top
Impact investing: focus is on generating positive, measurable social and environmental impact alongside a financial return
Thematic investing: focus is on a particular theme, such as cleaner oceans, gender equality, local employment and so on
Ethical investing: focus is more simplistic – screen out or blacklist booze, fags, guns, gambling and other ‘sin stocks’, and assume everyone else is alright
SMASHING THE RUMOURS
1. Does investing sustainably mean making less money?
In short, no! That used to be largely true of 'ethical funds', but times have changed and many sustainable funds are now outperforming their non-sustainable alternatives.
2. Are sustainable funds always higher risk and more volatile?
Nope. As with most investments, you usually get to choose the level of risk you're comfortable with before you invest. Just because your investment is sustainable doesn't mean its share price is more wobbly.
3. How do I know my investments are really having a positive impact?
This entirely depends on which investment platform, fund manager or financial advisor you use. Some of them make it easy with calculators and reports. Others don't. If yours is the latter, you may have to do your own sleuthing...
4. Is it too late to start investing sustainably? I'm about to retire...
Heard that sustainable investing is only for millennials? Fake news! No matter your age – and even if you're already retired – some form of sustainable investment might still fit with your goals. Check with a financial advisor if you're not sure.
Your pension pot – whether you set it up yourself or it’s managed by your workplace – is a collection of investments too. Why not make them sustainable?
If you know which pension provider (or providers) you’re with, you could give them a call or drop them an email to ask about switching to their sustainable/ESG/ethical options – if they have them.
If, like many if not most people, you have little idea of where your pensions actually are, companies like PensionBee (https://www.boringmoney.co.uk/isas-pensions/pensionbee/) will find them for you and combine them into one easy-to-manage pot. They have a sustainable option too, so it’s worth considering.
How to find out what’s in your pension already
We asked Mark Fawcett, Chief Investment Officer at NEST Pensions, how investors can get some clarity on what their retirement pots are funding:
- "The first place to go would be your pension provider’s website. Hopefully they will report on the types of investment they have. For us, in the report we publish annually, we say what we’re excluding – tobacco and controversial weapons – and say what we think about other things like the oil industry and managing climate risk.
- "If you go to a fund factsheet you’re probably only going to be shown the top 10 holdings, which doesn’t tell you much. We publish the top 100. You need to find a provider that has specific reporting on this. If they don’t, write to them and ask for it. Some are better than others."
WHAT ARE OTHER PEOPLE DOING?
Meet the Sustainable Savers
Investing with your heart as well as your head is gaining momentum. Just check out that chart – in a single year, people have tripled how much money they're saving into sustainable investments. And there's no sign of slowing down.
But what are investors doing with this money? How are they investing it? Let’s ask them, shall we?
Head over to our Sustainable Savers tribe page for investor stories, tips from independent financial advisors, and common questions from your positive impact community.
HELP ME CHOOSE
Where should I buy my investments?
Most of the popular investment platforms and robo advisers offer some shade of sustainable / responsible / ESG investment these days. There’s a fair bit of variety in what they offer, so it’s worth shopping around to decide:
Who has the investment funds that best suit your values and goals (look for fund lists and suggestions on each platform’s website – if they don’t make them easy to find, move on)
Who communicates clearly and passionately and in a way that appeals to you (you’ll be investing with them for years, so don’t get stuck with a boring dinosaur – unless that’s what you prefer)
Something to watch out for
When checking the sustainable credentials of investment platforms, consider this food for thought from Lewis Grant, Portfolio Manager at Hermes:
- "We now live in a world where everyone is talking about ESG. But you need to be able to find the ones that truly have heritage in this space, rather than those with a marketing department that’s just cottoned on to the latest hot trend.
- "So look for the people who have the pedigree. Look for the stories that show the providers are truly thinking about this in detail. Real-world examples that prove it’s not just a marketing message."
Need help choosing investments?
To compare investment funds and get a few ideas of what’s popular/good for you, check out our Sustainable Best Buys.