The march of sustainable investing has fundamentally changed the world of finance in recent times. Modern investors, particularly younger people, are taking a keen interest in the impact their portfolios are having on society. Investors across the board, from institutions to individuals, are demanding that companies disclose their sustainable credentials and allow for more informed choices.
Some investors may still be happy to take a detached view of their portfolio, but the spread of values-based investing is an undeniable trend. The priorities of investors will vary widely, but modern markets can facilitate a tailored approach that ensures that sustainability goals are achieved. Investors may feel strongly about individual causes such as environmentalism or protecting biodiversity and want to deploy some of their wealth to support these issues. Alternatively, there may be certain investments that some want to avoid, such as defence firms or the fossil fuel industry, and filtering these out of a portfolio might be high on the agenda.
The wide variety of sustainable goals tend to be grouped together under the umbrella of the Environmental, Social and Governance (ESG) acronym. Some of the more common aspects of ESG, particularly around the environment, are widely known, but committing to investing with this lens opens the door to encouraging change in a variety of other important areas. Investments can be judged based on criteria such as how well a company is run or how seriously issues such as employee rights or product safety are taken. Pressure from investors to change practices can be extremely effective and choosing whether to buy into an asset in the first place is one of the best ways to encourage change. If a company sees its share price sliding or a country sees its bond prices falling because of a poor record on sustainability, you can be sure it will register.
The rise of ESG
The rising popularity of ESG investing has been illustrated by the staggering amounts that have flowed into sustainable funds around the world. According to Morningstar, there were $2.24 trillion of assets invested in sustainable funds globally at the end of September, 2022. This demand for ESG-related funds has created a crowded market offering solutions to all kinds of investors. Whether an investor wants to deploy their funds into environmentally friendly French stocks or corporate bonds issued by responsible water companies, there is likely to be a vehicle that will accommodate their wishes.
There is also a strong argument to say sustainable investing is good for returns. Assessing how a company performs on ESG, we can gain an insight into how it will perform financially. Modern investors have less patience for companies with poor environmental and social records. Scandals and poor ESG performance can damage a company or sector’s reputation causing investors to head for the door. Companies with a good ESG track record are increasingly seen as stronger performers with a sustainable strategy signalling the likelihood of better results.
How do I avoid greenwashing?
Anyone thinking seriously about making their investment portfolio more sustainable should ensure that the credibility of any ESG investments they choose is high. The rise in interest amongst investors for sustainable assets has been accompanied by a flurry of classifications, some more reliable than others. While regulation is slowly catching up and providing protections against false claims, sometimes known as ‘greenwashing’, conscientious investors should discuss their intentions thoroughly with their investment advisor to ensure that claims are valid.
At London & Capital, we put sustainable investing at the heart of what we do. We offer clients the opportunity to tailor their investment portfolio to align with their values. We use a mixture of our own analysis and external assessment when we look at potential investments. For clients that prefer to take a hands-off approach, they can still be sure that ESG considerations are taken into account, and for those that want more input, reliable information is available to make better decisions.
If you’d like to discuss how ESG fits into your investment portfolio, our advisors are on hand to talk you through this trend and make sure you achieve your desired outcomes.
