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The environment is climbing up the agenda in 2019. During the December UK general election campaign, for instance, The Labour Party made it a core pillar of their campaign, calling for a “Green Industrial Revolution”. ITV also ran its first-ever leaders TV debate on climate change, titled “Emergency On Planet Earth”. In the financial sector, “ESG investing” (environmental, society & governance) is also moving more into mainstream discourse.
Here at WMM, it’s a particular topic of interest for our clients who are interested in making their portfolio more ethical or environmentally-friendly. Yet, it’s fair to say that many misconceptions still circulate about ESG, ethical and social impact investing. In this short guide, we’ll be tackling some of these myths head-on. If you’d like to know more about ESG investing or want to discuss your investment strategy with us, please get in touch to arrange a free consultation:
Reach us on 01869 331469
Myth #1: You need to be rich to invest in ESG
There seems to be a widespread perception that you need to be a philanthropic millionaire to be able to invest in “green opportunities”. The image is often of a young, idealistic investor with more money than sense, throwing money to the wind at individual ethical startups which have a high minimum investment barrier. The good news is that you don’t need to be super-wealthy to start diversifying your portfolio to include ESG investments. There are many “sustainability funds”, for example, which you could speak to your financial adviser about.
Myth #2: All investments labelled “green” are ethical
Just like other things in life, a fund or other investment is not necessarily “green” or “ethical” simply because it has these labels in their name. This is where working with an experienced financial adviser can offer great value. They can help you dig under the surface and look at the real composition of the fund sitting under the label.
Remember, people also have different opinions about what qualifies as an ESG investment. For some, it will be important to not just avoid certain markets or sectors (e.g. tobacco, arms or oil), but choose funds or companies which are actively combating climate change. Other people will be happy to simply invest in funds where companies are limiting their carbon footprint. The important thing is to do your due diligence and build a portfolio which you are comfortable with.
Myth #3: Making money is less important than values
Whilst we do not wish to diminish the importance of protecting the environment, it’s crucial to make the point that ESG investing is not about charity. Profits and investment returns matter. The common perception that “values beat profits” often feeds into the widespread belief that ESG investing provides lower returns compared to non-environmental funds. In other words: “To do the right thing with your money, you need to sacrifice your opportunities for wealth growth.”
Whilst past performance is not a guarantee of future returns, we should note that many ESG and other environmental funds have matched other ‘Non-ESG funds’ performance and often surpassed them. Indeed, investment platform AJ Bell researched some of the top ethical funds earlier in 2019 and found that nearly three-quarters outperformed their non-ethical counterparts.
Myth #4: There’s no difference between ethical funds
Many people believe that most if not all of the ESG and environmental funds on the market essentially contain the same investment opportunities. This perception is often accompanied by the impression that there simply aren’t many successful, growing companies with an ESG agenda which these funds can choose from.
Quite often these beliefs are rooted in a particular idea about ethical investing – i.e. it is mostly concerned with protecting the environment. However, ethical investing goes much further than that. There are companies which pursue ethical values in areas such as pornography, gambling and alcohol, for instance. ESG investing, in particular, broadens the agenda from a narrow focus on the environment to also include companies which try to make a positive impact on their staff, local communities and industry practices.
Myth #5: ESG investing is a bigger time commitment
There is often an impression that it takes more effort to invest in ethical companies and funds, since you need to check their credentials to ensure they reflect your values. Whilst this does add a bit more due diligence, investing in ethical funds is very similar to investing in non-ESG funds. Your financial planner can help you check the fundamentals of the fund, as well as the individual companies which it comprises. Unless you are a sophisticated investor interested in “Dragon’s Den-style” investing in individual companies, working with ESG and other social impact funds should not add a significant burden of due diligence.
Myth #6: Ethical investing is for idealists
Some people look down on ethical investing, seeing it as an option for less serious investors. For them, this investing style is more of a fringe activity often done by those with over-sensitive consciences. Yet this view is increasingly becoming untenable. Ethical investing is moving into the mainstream with each passing month. Just this year in 2019, for instance, the National Trust told the public that it would move its investments out of fossil fuels. More and more people care not just about their investment returns, but the ethical credentials of those investments too.
Final Thoughts
If you want to start a conversation about your financial plan or investment strategy, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us on 01869 331469
