Striving for a financial return and being enthusiastic about battling climate change, biodiversity loss, and the issues brought on by plastic are becoming increasingly popular among investors. But is it a viable strategy to invest with the intention of doing good?
In this article, we have explored five suggestions for responsible investing so you know where to start.
So, how much do you actually need?
In 2021, £16 billion was invested in ‘responsible’ investing ventures, an increase of £4.3 billion from the previous year. An additional £5.6 billion has been invested so far this year. ESG funds, which invest in businesses with good environmental, social, and governance standards, are a typical example of responsible investing.
Most people will be familiar with ESG investing by now, given that it has gained much publicity in the last few years. Many platforms provide scores for stocks that indicate the ESG credentials of a company and allow investors to build portfolios based on these factors.
Brite have created ESG-focused portfolios for our clients who want to benefit from the potential financial benefits these stocks can offer and those who want their investments to align with their morals and values.
Impact investment funds
Impact investment funds, on the other hand, only support businesses that provide goods or services that support the 17 sustainable development objectives of the United Nations, and have a beneficial social or environmental impact.
Numerous impact and general ESG investing funds are available, as well as funds that concentrate on environmental concerns like reducing carbon footprints or developing ecologically friendly goods and packaging. When it comes to ethical investment, there is no “one size fits all” solution because much of it is personal preference and not necessarily obvious.
A problem arises from investing in oil firms. Even if some are making significant investments in renewable energy, most of their income still comes from the dark stuff. The decision to invest or not is ultimately up to the individual.
How might my finances influence change?
Saving in ethical funds empowers fund managers, the individuals in charge of deciding how savers’ money is invested, with the leverage to pressure businesses to alter their behaviour. For example, they can compel companies to use less plastic packaging or accelerate decarbonisation.
Some investors use an alternative strategy to withdraw their investment from any company they believe to be unethical (also known as divesting). Divesting fossil fuels is a strategy to cut off financial support for sectors of the economy that pose a hazard to the environment.
The problem is not clear-cut, though. Through their diversification into greener sources and fields like the infrastructure for electric vehicles, as BP has done, the energy companies can play a big part in the shift to a low-carbon economy. Instead of encouraging businesses to invest, starving them of funds may hinder that process. This is one reason oil and gas prices will continue to rise even after the Ukraine conflict is resolved because the cost of financing has gone up.
Does responsible investing make money?
ESG funds have been competing favourably in performance terms with unrestricted, non-ESG funds up until the latter half of last year. However, the performance of ESG funds was down at the end of 2022, but only slightly more than the broad stock market.
In many respects, 2022 was a challenging year. While the worst pandemic in recent memory appears to be finally diminishing, there has been very little good news to raise spirits. This is true despite the cost of living crisis, armed conflict, and extreme weather disasters. This also applies to the financial markets, where not only have all investors suffered but responsible investment funds have been hammered particularly hard.
Responsible funds must catch up to their conventional counterparts in the short run. However, two categories, “responsible UK all companies” and “global funds,” continue to lead after a five-year period, which is good news for environmentally conscious investors.
Should I be concerned about stranded assets?
If companies that extract coal, gas, and oil are required to maintain a significant amount of their supplies in the ground, they run the risk of becoming “stranded assets.” The possibility of stranded assets is a crucial factor. Facilities, pipelines, and other infrastructure are essential for gas and electricity supply, and they require ongoing investment just for safety.
If fossil fuel consumption is wholly eliminated, these assets will eventually be rendered obsolete. This must be taken into account as a significant investment risk by financiers. Often, investors aim to steer clear of companies with exposure to possibly stranded assets.
Given the integration of the financial system, this might eventually develop into a systemic danger, as we witnessed during the credit crisis, where issues that started in the US mortgage market had an impact in the most unexpected locations.
Green up your pension
As more people learn the value of saving for their future, turning your pension green is growing in popularity. Change to funds that support an ESG approach if your pension is not invested in a manner you are happy with. Brite will always respect their client’s wishes regarding ESG investments.
How can I tell if a fund is accountable or effective?
If you are using an investment platform to make your decisions, remember that a fund advertised as “sustainable” may not be. Be wary of organisations or funds that portray themselves as dedicated to sustainability but are, upon closer inspection, evasive on their investment methodology.
Contact Brite here if you have any questions about responsible investing, our dedicated investment advisors are on hand to help.