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Sustainable & ESG investing guide

24/08/2020

The Basics

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.

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

Is It Right For Me?

Good if you ...

  • Want your money to have a positive impact
  • Have a timeframe of at least 5 years
  • Are fed up with low cash interest rates

Not Good if you ...

  • Need to access the money at short notice
  • Have debts you need to pay off first
  • Will faint if markets have a bad year

People like you ...

Among existing fund investors

74%

say it's important to actively consider ESG factors

The Numbers

The Benefits

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The Detail


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.

Learn the basics quickly

 

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.

Customer review comparison tables

Investment Fees Calculator

+ Scroll down to ‘Help me choose’ for more

 

3. Choose your first investment fund

Start simple by comparing investment funds (ready-made bundles of various investments) based on their sustainable impact goals and level of risk v reward.

Use our fund comparison tool

Compare platform fees and ratings in one place

investment fees calculator

Try the Investment Fees Calculator


ESG who?

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.

1. ESG

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.

2. Sustainable

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)

3. Responsible

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 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

esg 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.

Read the detail

 

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.

Read the detail

 

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... 

Read the detail

 

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.

Read the detail

 


Sustainable pensions

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 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."

Are you saving enough for retirement?

Money Advice Service

Try the retirement income options tool
from Money Advice Service


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.

Read investor stories, tips and FAQs


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 has the fairest fees and best service based on the amount of money you want to invest (use our Investment Fees Calculator to quickly compare both costs and customer reviews)

• 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, check out our list of award-winning sustainable funds and our list of funds that appear on multiple best buy lists. And check back soon, as we're also working on ESG and Sustainable Investments comparison tables - coming soon.

Putting your money where their mouth is

One of the important roles of an asset manager (the companies you buy your investments through) is to vote on decisions that affect the future of the companies you invest in. That could mean adopting a more green approach, or taking power away from a megalomaniac CEO.

But just how good are asset managers at exercising their voting rights?

Charity group ShareAction identified the best and worst of the lot when it came to voting in favour of climate change resolutions:

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