Investing

Sustainable investing: why it matters where you put your money

29 August 2020 | Posted by Hannah Duncan
living sustainably

73% of consumers recognise the importance of living sustainably, yet only 43% invest in line with these values. Research shows that simply switching your pension pot (which is most people’s largest investment portfolio) to a sustainable option reduces your carbon footprint 27 times more than giving up flying and becoming vegan combined!

So why aren’t more people investing sustainably? 12% of people cite a lack of knowledge as their main reason. Sustainable investing is still a growing topic, and so it can be tricky to pin down. Other people think that they’ll get less money back if they invest in sustainable ventures, which is quite an outdated belief. In this article, we’ll uncover the essential benefits, potential traps and must-know information about sustainable investing today.

What is sustainable investing?

Sustainable investing is a style of investing which focuses on protecting and improving the planet as well as growing returns. This could be by investing directly in things like new green energy plants and measuring the change, known as impact investing.

Or it could be as simple as screening out any unethical stocks lurking in investment portfolios, such as weapon manufacturers, gambling or adult entertainment companies. As you can imagine, there are lots of different approaches to sustainable investing! 

To try and create some more transparency, many sustainable investments are now categorised into an Environmental, Societal or Governance (ESG) group. Collectively, these investments are known as ESG investments.

How do sustainable investments perform?

Over the last decade, sustainable investments have delivered better returns than traditional investments. 

According to MorningStar, global ESG funds have brought in returns of 6.9% over the past ten years, compared to 6.3% for traditional funds. Over three years the performance is even more impressive, with ESG funds averaging gains of 11.3%, compared to 9.9% for traditional ones. So, if you’d invested £5,000 three years ago in sustainable investments, you’d expect to have £5,565 now. If you’d invested £5,000 in traditional funds, you’d expect to have £5,495, which is £70 less. 

Since the coronavirus pandemic, ESG investments have proven to be especially resilient in the turbulent markets. While the average traditional investment fund lost 1.5% of its value over this time, ESG funds gained returns of 4.3%, according to research by Moneyfacts

So, according to the average above, if you’d invested £5,000 in traditional investments at the start of the pandemic, you’d now expect to have £4,925. But if you’d put that money into sustainable investments instead, you’d probably have £5,215. In general, sustainable investing is holding up well. Remember that with all investing, your capital is at risk.

The benefits of sustainable investing are not just financial – it can make you feel good, too.

Are sustainable investors happier?

Money can’t buy you happiness. But according to the UN-backed 2020 Happiness Report, supporting the UN’s Sustainable Development Goals can. The report finds that the happiest countries are not the richest ones, but the ones who prioritise their environment, society and good governance. 

When our investing goes against our morals, it creates what’s known as cognitive dissonance, or an uncomfortable feeling. When we invest in a way which has a deeper purpose, we tend to feel more at peace. This is why sustainable investing can help improve our mental health. This might explain why 77% of investors today would rather invest in line with their ethics, even if it means missing out on a profit. And interestingly, the older (and wiser!) the investor, the more likely they are to put morals ahead of money, according to research by Schroders.

Can sustainable investing save the planet?

Of course, there are much wider benefits too. According to the European Commission, we need to invest more than €1 trillion in climate-friendly solutions over the next decade. Otherwise, we will not be able to stop the planet from irreversibly warming. The world urgently needs investment in planet-saving products. The EU is putting 25% of its total budget behind this, which is around €500 billion, but to succeed it needs help from public and private investors too. 

Sustainable investing has the power to protect our planet. In the years to follow we expect to see many new regulations which will put heavy restrictions on fossil fuel companies.

Are there any disadvantages to sustainable investing?

A few years ago, people thought that sustainable investments were not diversified enough. They felt that the companies available were too similar to each other, which would be risky for investors. However, this view is outdated. 

Today 90% of the S&P 500 companies, the top 500 U.S. companies, report on their ESG progress. They want to show the world that they are sustainable. In 2013, less than 20% did. And a record-breaking 330 ESG funds are now available in Europe alone. Now, the problem is that too many companies claim to be sustainable, and it’s hard to differentiate the truth from the marketing. This problem is known as “greenwashing”. 

Within many sustainable investment funds, you can find fossil fuel companies, tobacco, fast fashion, fast food, plastic polluters and more. Since the definition of “sustainability” is so broad, unlikely companies can sneak in. They can often do this by focusing on improving the governance or “G” of ESG. J.P. Morgan estimated that if you use the broadest definition of sustainability, the market would be worth around $45 trillion. Of course, if $45 trillion were truly invested in the planet, we’d be living in a very different world. And so, somewhere along the line, you can see that there’s a gap between sustainable investment and sustainable action.

How to become a truly sustainable investor

If you’re hoping to pick up some planet-saving profits without the greenwashing, there are two main ways you can get started. 

  • Choose an ethical fund or portfolio to invest in (you can do this on Claro)
  • You could analyse sustainable stocks and build your own sustainable investment portfolio.

As with all investing, your capital is at risk.

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