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Climate change is top of the agenda as the Glasgow Climate Change Conference (COP 26) comes to an end. World leaders congregated to discuss how to limit emissions and develop more sustainable economies, with varying options on their success. Many people know that there are ways to live in a way that helps protect the environment such as recycling, limiting road and air travel and reducing meat consumption. However, the way you invest your money can also have a big impact – incentivising companies and fund managers to decarbonise. In this article, our financial planning team at WMM here in Oxfordshire explains how “sustainable investing” works and how it can be built into a portfolio.
What is sustainable investing?
As investors have become more aware of the link between their investments and moral causes, new language has emerged to describe investments which seek to align with certain values. For instance, “ESG” investing began in the 1960s and has rapidly increased in popularity in the last 10 years – referring to investments which promote causes relating to the environment, society or governance. This might take the form of an investment fund which excludes oil and gas or gambling firms, and which includes businesses which seek to improve gender equality within their workforce, as well as the areas in which they operate. Rather unhelpfully, “ESG” is often used interchangeably with the phrase “sustainable investing”, with only tenuous linking to environmental protection.
How to invest sustainably
There are different ways to make your portfolio more sustainable, or environmentally-friendly. One approach is quite radical – involving cutting out all companies and industries which do not preserve the environment (e.g. mining). This has the benefit of aligning investors’ values most closely with their assets, yet it can be very restrictive for your choices. As such, another option is to find “industry ESG leaders” within all sectors – including ‘harmful’ ones like mining” – which set a good example for their peers regarding de-carbonisation and environmental preservation, so supporting their efforts at the exclusion of rival Companies with lesser focus on these issues.
There is also the option of “gradual incorporation”, whereby most of your portfolio is not built around ESG principles but which slowly introduces ESG investments into the mix. This can feel like an uncomfortable compromise for some people, but can be a viable route for investors who are wary of the investment returns offered by certain ESG funds. Another idea – for shareholders with significant influence (e.g. company owners) – is to raise sustainability issues with the board and wider ownership.
One key thing to bear in mind with sustainable funds is that their holdings are usually picked by a professional fund manager – supported by research/admin staff. This “actively managed” fund structure means that you may end up paying higher fees for ESG funds compared to, say, another active fund in the same market without ESG claims. Whilst one might expect higher costs than an index fund (which tracks the market and so involves fewer overheads), increasingly there are “passive ESG funds” available for investors to consider. Typically a cheaper option, a passive fund does not necessarily entail a compromise in investment performance. A financial planner can help you sift through the various options to find good candidates for your portfolio – depending on your goals and the ESG strategy which might appeal to you.
You could, of course, also try constructing your own portfolio of individual stocks. However, this is a very difficult strategy to pursue effectively and requires a lot of research to find good ESG stocks, invest in them and know when to buy/sell. Trading fees can also rack up and eat into your returns if you are not careful.
WMM have had an interest in sustainable investing long before it gathered more recent popularity and attention. We recognise that most people want their investments to be in ‘decent’ Companies. Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469