What Is Ethical Investing & How Can I Start?

Environmentalism is moving increasingly into mainstream public consciousness. People are increasingly concerned about how their behaviour, habits and even investments are impacting the planet.

This is where financial planners often start discussing ethical investing. Other broad, related categories include “ESG investing” (Environmental, Social & Governance) and “social impact investing.”

Here, we’ll be outlining what these kinds of ethical investing look like and what they tend to involve. You will also find some tips about how to start discussing the topic with your financial adviser. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.

What Is ESG Investing?

There is no doubt that different companies have varying impacts on the planet and human society. A financial planning business such as ours, for instance, is a service-based business and so does not have a supply chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater impact due to the size of the business and the nature of its core product.

ESG investing is an approach to investing that factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).

Is ESG Investing New?

It might surprise you to know that ESG investing was quite a “fringe” approach to investing until recent years, when investor demands have brought it increasingly into the mainstream of investment management solutions.

There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally conscious.

There is also the fact that many companies themselves have experienced considerable internal change with regard to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.

There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.

How Do I Start ESG Investing?

The important thing to recognise with ESG investing is that it is broadly intended to achieve two goals simultaneously:

1/. Meaningful investment returns for the investor;

2/. Produce a positive impact on the environment, governance and society.

To a degree, these two goals are in constant tension. Sometimes, investors are tempted to sacrifice investment performance in the hopes of producing a positive, sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.

On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal above.

A good independent financial adviser will be able to help you navigate the world of ESG investing carefully, with these two goals (as well as your own financial goals) in mind.

For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.

Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.

Final Thoughts

We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.

We recommend that you consult an experienced financial adviser before making any big decisions about your money, wealth or investments. We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.

The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.