Most of us are now making changes to our lifestyles as we’ve become more aware of the impact of our actions on the planet and those around us.
Along with choices such as ditching plastic, switching to electric cars and embracing plant-based diets, an area that has gained phenomenal momentum in the past few years is sustainable and ethical investing – often now just referred to as ESG (Environmental, Social and Governance). By the end of 2020, a total of US$1.6 trillion was invested globally in ESG fund assets according to Morningstar as people become alert to both the significant impact their investments can make and the exciting investment opportunities available.
But with 300 fund launches in Morningstar’s European sustainable fund universe alone in 2020 – taking the total number up to more than 3,000 – and so many companies jumping on the bandwagon, where do you start and how do know the investments you’re choosing are as ‘green’ as they claim to be? It’s a green maze, there’s no doubt about that, but changes are afoot and, in the meantime, Tilney can help you navigate it. We have been managing ethical and sustainable portfolios for more than a decade and, in 2021, were awarded Best ESG Investment Strategy at the City of London Wealth Management Awards.
Why the green maze?
Language
Let’s start with the language. Often, when something develops quickly, it takes a while for the language to establish and we’re certainly seeing this here with the lack of standard definitions. Is it sustainable, responsible, ethical or conscious investing? And what about ESG? At the moment, investment providers are all using different labels and terminology.
Methodology
It’s not just language. An evolving framework and differing methodologies mean it’s really tricky to make comparisons let alone informed decisions. Thankfully this is changing. The United Nations’ 17 Sustainable Development Goals for 2030 set out how to achieve a better and more sustainable future. They cover issues such as the environment and poverty and allow for greater reporting of investment impacts beyond financial returns. There’s also the EU’s Sustainable Finance Disclosure Regulation, which aims to improve reporting by fund managers and ensure consistent use of definitions and data to make comparison easier and the EU’s Sustainable Taxonomy, another initiative to standardise industry definitions.
Your own values
While some industries, such as heavy polluters, are fast becoming a no-no, others are not so clear cut and it often comes down to personal preference. For example, are you comfortable with the inclusion of alcohol companies in an ethical investment portfolio and how about drug companies? There isn’t necessarily a right or wrong. Instead, it’s down to your own values so research is needed before choosing investments.
Avoiding the greenwash
Who doesn’t want to appear green these days? Unfortunately this means that greenwashing – where a business or investment claims to be greener than it really is – is rife and when you combine this with the challenges we’ve already highlighted, it’s plain to see why picking investments in this area is so challenging.
A roundup of the different investment approaches
Ethical – this approach focuses on aligning your investments with your ethical principles. For example you may consider tobacco companies unethical so you would exclude them from your portfolio.
ESG – here environmental, social and governance factors are taken into account alongside financial returns.
Sustainable and responsible – ESG factors and themes are incorporated to focus on companies that can grow sustainably over a long timeframe.
Impact – the intention here is to make an impact through investments alongside a financial gain.
Common investment processes
Investment funds in this part of the market can have very different investment processes.
Screening – here a fund manager will go through a benchmark such as the FTSE All-Share and remove those companies that don’t fit with its ethical criteria.
Best in class – the fund manager will pick those companies in different classes that have the best ESG policies so, for example, they could choose an oil & gas company with better ESG credentials than its peers.
Engagement – shareholder influence is used to persuade companies to adopt better policies while enhancing shareholder value
What is abundantly clear is that you need to think carefully about your motivation and your principles before picking investments.
Will my investments make any money?
The traditional view was that you had to sacrifice returns if you wanted to align your investments to your values but ESG funds are now holding their own and often outpacing their non-ESG equivalents so it is no longer a case of value versus values. But do remember, as with all investments, the value can go up and down and you can lose money.
Past performance is not an indication of future performance.
Sustainable and ethical investing with Tilney
We offer a sustainable managed portfolio and can also build a tailored portfolio for you. If you’d like to speak to an expert, we offer free consultations. You can book online or call on 020 7189 2400.
We believe the key themes associated with sustainability are now mainstream and provide an attractive investment opportunity as the global economy becomes more focused on sustainability.
The value of an investment may go down as well as up, and you may get back less than you originally invested. Please note that some ethical funds may, by definition, have a limited investment universe; this may affect performance.
Issued by Tilney Investment Management Services Limited, authorised and regulated by the Financial Conduct Authority.
About Tilney
Tilney is an award-winning financial planning and investment company that looks after more than £25 billion on behalf of our clients. At Tilney, your personal wealth is our personal responsibility.
