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Ethical and ESG investing explained
This kind of investing is all about doing good with your money. At a headline level, it’s about choosing to invest in companies that you believe are doing right by this world – for example those involved in renewable energy or sustainable transport – and shunning those that you don’t.
It used to be considered a niche area of investing and one where you’d probably have to compromise investment returns but all that has changed. There is now US$1.8 trillion invested in the ESG market across approximately 4,000 funds* and the key themes associated with sustainability have become mainstream for both businesses and consumers.
How do I start investing ethically?
Navigating the green maze
You’ll already have noticed the different terms, abbreviations and buzzwords. Is it ethical, ESG, SRI or impact investing you should go for? And how do you know you’re not falling for greenwashing? At Bestinvest we call this the green maze and, thankfully, we have a knowledgeable investment team to help everyone navigate it.
Your ethical investment jargon buster
What is ethical investing?
Ethical investing focuses on avoiding investments in sectors such as gambling and tobacco.
What is ESG investing?
ESG stands for Environmental, Social and Governance. These factors are considered alongside financial returns as part of ESG investing.
What is SRI?
SRI is short for Socially Responsible Investing. It focuses on ‘best in class’ investments based on Corporate Social Responsibility reporting.
What is impact investing?
Impact investing is about making sure your investments generate an environmental and social impact as well as a financial return.
What is greenwashing?
When a company makes out it is greener than it really is, this is called greenwashing. If you’re choosing ethical investments, it’s important to make sure your investments are the real deal.
What is your motivation? Is it a single issue, such as the environment, that matters more to you than anything else? Or are you looking for a broad-based approach to investing ethically and sustainably? Once you’ve answered this, you can choose how to invest.
You can buy shares in companies that align with your values. But you do need a lot of time and knowledge to get this right so many people – particularly those that are new to investing – opt instead to buy funds. These funds have different investment processes to conventional funds and can vary on a fund-by-fund basis so it is important to do your homework before investing. We have a free guide – The Best™ Funds List – which lists our favourite funds across all major sectors. You’ll find our favourite ethical and sustainable funds on page 24.
Will ethical investments make me money?
There was certainly a belief in the past that investing ethically meant compromising returns but in recent years there have been good examples of funds in this sector performing in line with non-ethical or ESG investments and, in some cases, doing better. Of course – as with all investments – you need to choose wisely and past performance is not a guide to future returns.
Please note that some ethical funds may, by definition, have a limited investment universe; this may affect performance.
Why invest with Bestinvest?
We haven’t just jumped on the bandwagon when it comes to ethical investing. Bestinvest has been analysing investments in this sector for a long time and has helped many people invest in line with their values for many years.
- Choose ethical funds, including those on The Best™ Funds List**
- Invest in shares
- Opt for a sustainable Ready-made Portfolio
A range of accounts
*According to Morningstar 2019.
**The Best™ Funds List is a trademark of Bestinvest.
***SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you.