What is sustainable investing?
Sustainable investing is an investment strategy that seeks to generate long-term financial returns while considering economic and social factors. It's built upon the premise that firms shouldn't be judged solely on short-term economic gains but on how they aim to contribute more broadly to society.
It started with values-based investing, where investors avoided industries like tobacco, alcohol and weapons. Sustainable investing is now a mainstream mode of investing due to an increasing awareness of the need for responsible corporate behaviour.
It's also important to remember that the value of investments can go down as well as up and you could get back less than your original investment.
To be classified as a sustainable investment, assets such as funds or shares in companies must generally have the potential to be beneficial to areas such as:
- Habitats and ecosystems: avoiding negative impacts on nature as far as possible and helping to protect and restore natural systems.
- Resource efficiency: promoting conscious use and consumption of natural resources.
- Decent work: supporting good quality employment that enables workers to meet their basic needs and pursue fulfilling lives.
- Energy and the climate: supporting decarbonisation and aligning with the Paris Agreement on Climate Change.
- Health and wellbeing: encouraging improved physical and mental health, and reducing avoidable deaths, injuries and illnesses.
For example, a sustainable investment could be a fund that invests in companies focused on renewable energy.
What is the difference between sustainable investing and socially responsible investing?
Kate Elliot, head of ethical, sustainable and impact research at Greenbank, explains:
"Sustainable and socially responsible investing are often used interchangeably, but they're slightly different concepts. Sustainable investing prioritises investments that have the potential to help address social and environmental challenges. This means that sustainable investing is often centred on carbon reduction, renewable energy, good labour practices and human rights, among other things.
But sustainable investing isn't just about doing the right thing - it's about smart business. Companies increasingly recognise that focusing on sustainability can drive long-term value. By considering environmental, social and governance factors, they’re mitigating risks and positioning themselves to capitalise on new opportunities. It’s about building resilient businesses that thrive in a rapidly changing world."
What are the different sustainable investing strategies?
Negative screening
Positive screening
Impact investing
Thematic investing
Green, social and sustainable bonds
Shareholder activism
Benefits and drawbacks of sustainable investing
Although sustainable investing could have positive impacts, it's important to thoroughly understand the potential limitations, too.
Benefits of sustainable investing
- Potential for positive societal or environmental impact: Investing capital in sustainable investment funds allows investors to invest according to their values, and what they believe in. Their investments could contribute to better social equality, fair labour practices, lower carbon emissions or increased biodiversity.
- Long-term results: Companies with strong sustainability and Environmental, Social and Governance (ESG) practices could be more resilient in the long term as they manage risks better and often capitalise on emerging opportunities. However, positive returns aren't guaranteed.
- The potential to contribute to positive company change: By investing in sustainable companies, you could scrutinise the actions and governance of companies to encourage positive change.
- Lower risk: Sustainable companies may be less prone to environmental disasters (like oil leaks), regulatory changes or human rights breaches.
- Reduced exposure to reputational damage: When you choose sustainable investing, your exposure to reputational risks may be reduced compared to investing in controversial industries.
Drawbacks of sustainable investing
- Lack of standardised reporting: As there isn't a uniform reporting framework in Environmental, Social and Governance (ESG) investing, it can be hard to compare companies' sustainability performance.
- Risk of greenwashing: Greenwashing is where a company exaggerates its environmental credentials to make its practices seem more ethical. Investors must review each company's environmental credentials to try and substantiate sustainability claims.
- Fewer investment opportunities: As you're applying strict criteria regarding which companies you will/won't invest in, the number of companies to choose from may shrink.
- Global sustainability issues are complicated: Climate change, poverty and social inequality are multifaceted topics. Sustainable investing alone can't solve some of the world's most pressing challenges. However, it could help promote positive change.
- -As with all investing it's important to understand all the risks and that the value of investments can go down as well as up and you could get back less than your original investment.
Speak to Greenbank about sustainable investing
Personalised portfolios: We use our expertise and experience to craft a portfolio of investments that aligns with your values and meets our minimum sustainability threshold.
- Always accessible: Our investment managers are just a phone call away, and you can also reach them through the MyRathbones app. If you prefer in-person interactions, our five offices across the UK ensure you can reach us easily.
- Award-winning managers: We are extremely proud of our team, who have been honoured at the 2024 Investment Week Sustainable Investment Awards and the 2024 Investment Week Women in Investment Awards.
- Active managers in the sustainability sector: We've partnered with numerous sustainable organisations and have committed to achieving net-zero emissions by 2040. This is a key part of our engagement action plan and demonstrates our commitment to sustainability – as portfolio managers and as a business.
To find out how we could help you navigate your investing journey, fill out our online enquiry form and a member of our team will give you a call back.