Why has ethical and sustainable investing become so important?

This week is Good Money Week – every year the campaign raises awareness of sustainable, responsible and ethical finance. Sustainable and responsible investing has become increasingly popular in recent years since people have started to see the effects that they and the companies they invest in can have on the world. In this article we look at how it works.

Published on 01 Oct 20184 minute read

The growing importance of Ethical, Sustainable and Governance investing

In recent years numerous scandals and disasters have sparked debates around what’s ethical in finance. For example, BP’s oil spill in 2010 from an underwater well was devastating for the environment after the oil leaked for 87 days. Elsewhere, Volkswagen’s ‘diesel dupe’ scandal saw diesel cars sold that were fitted with a ‘defeat device’ which could detect when emissions were being tested and cheat the system.

As a result of these events and many more, alongside a general shift in focus towards sustainability within the general population, it’s become more important for companies to improve their Ethical, Sustainable and Governance (ESG) practices. In fact, ESG is used as an integral part of company analysis nowadays.

According to Senior Research Analyst Louie French: “At Bestinvest we believe that the key themes associated with sustainability are now the mainstream for businesses and consumers. They also provide an attractive investment opportunity as the global economy becomes more focused on sustainability.”

Anisha Randhawa, an investment adviser from our Investment Advisory Service, has also seen increasing interest in ethical investing: “I am finding that growing numbers of clients are taking an interest in ethical and sustainable investments. We have a range of ethical funds available to invest in, and we can also be flexible over what proportion of each client’s portfolio is invested in this area.

The good news is that each of these funds will have a set of objectives and an approach to ethical investing which it will stick to over the long term, so investors don’t need to worry about their money ending up in sectors or industries that they want to avoid.”

How do the funds work?

Despite the positive momentum behind the wider sector, it is not always easy to choose ethical and sustainable investments. For a start, there are different interpretations of ESG, meaning funds differ in their approaches to ethical investing as well as their correlation with mainstream benchmarks. Some of the most common approaches are:

Screening

Typically, fund managers will take a benchmark such as the FTSE All-Share or MSCI World and remove companies deemed unethical or unsustainable. Positive screening is when companies are included because they make a positive contribution to society or the environment.

Best in class

The best in class approach is when a fund manager selects a company that has better ethical and sustainable policies than its industry peers.

Engagement

The basic methodology of engagement is to use shareholder influence to actively pressure companies to employ better policies while trying to enhance shareholder value.

Outside influence

The majority of funds use outside resources made up of experts from charities, faith-based organisations and non-governmental organisations (NGOs) to implement fund objectives.

How green is green?

As well as taking different approaches to sustainable investing, funds in this sector also differ in the strictness of their ethical criteria. They are frequently split into three groups on ‘the green scale’.

Dark green

The strictest form of ethical criteria. Typically the fund manager is unable to invest in a substantial part of the market, particularly alcohol, defence, gambling, mining, oil and gas, and tobacco.

Mid green

The middle ground. These funds focus on most of the issues considered by ‘dark green’ funds, but they may include some exposure to oil, banks and pharmaceuticals.

Light green

The least strict of the ethical criteria. Light green funds tend to focus on best in class ESG and can invest in sectors that ethical investors may be uncomfortable with. They are typically more closely aligned to mainstream funds and indices.

Our top ideas for ‘green’ investing

For those who are thinking about investing in ‘good money’ funds, we’ve published a new guide with an overview of how ethical and sustainable funds work, plus a selection of our top investment ideas for ‘green’ investing. Why not take a look?

Download the guide

Speak to us

If you want to learn more about ethical and sustainable investing or our ‘good money’ ideas, we can help. Call us on 020 7189 9999 or email best@bestinvest.co.uk.

Important information

The value of an investment may go down as well as up and you may get back less than you originally invested. Please note that ethical funds may, by definition, have a limited investment universe; this may affect performance.