B: Belief – investing with conviction

Written by Simon Hildrey on 20th Mar 2023

This article is from our new guide The ABCs of ISAs – a Good Guide, which is available to download for free here.

Investing through an ISA can be about much more than just making a good financial return.

Investors today increasingly want their money to contribute to a better world; one that supports the environment and human welfare. This means investing according to your personal beliefs and convictions, or ‘sustainable investing’.

A sustainable world is one in which benefits can be actioned today without sacrificing our future environment, social well-being and health. Achieving this means tackling some really serious challenges such as climate change, poverty, inequality, discrimination and hunger.

Principles as well as profits

It requires you to look at the companies in which you might invest through a lens focused on more than just profits.

This means looking at what impacts a company has on the environment and society, including its goods and services and its everyday operations. How does it treat its employees and other key stakeholders? What about its suppliers and customers?

You will need to ensure your investments meet your own sustainability goals. Individuals will have differing views on what sustainable investing should be and what their priorities are.

It is important to remember that improving the world is not contradictory to making excellent returns: Liontrust’s Sustainable Investment team believes the companies that will thrive are those that improve people’s quality of life, increase the efficiency with which we use scarce resources and enhance the safety of human activities.

How does sustainable investing work?

On the most basic level, sustainable investment can involve negatively screening out companies if they are deemed to be involved in unethical practices. However, investors are increasingly demanding that the companies in which they invest make a positive environmental, social or governance (ESG) impact.

There is a variety of criteria to measure such positive outcomes, including the 17 Sustainable Development Goals (SDGs) established by the United Nations in 2015. The SDGs are a call to action to end poverty, protect the planet and ensure that all people have peace and prosperity by 2030.

Advantages of sustainable investing

The many billions that investors put into sustainable investing funds every year are used to achieve crucial positive outcomes for the environment and society. For example, if you want to help preserve the environment by promoting renewable energy development or wish to support healthcare in developing countries, then you can invest in companies that operate in these areas.

Investing sustainably can also reduce risk. Regulators are coming down
ever harder on corporate malpractice. Investing with companies that have a responsible approach to ESG can significantly reduce the regulatory risk of fines and legal penalties, as well as the reputational risk caused by negative media coverage.

How to invest in a sustainable investment fund

First, you must be clear about what your own financial and sustainability goals are. You may wish to select funds to build a portfolio yourself or seek the advice of professional financial advisers.

As more funds launch into the sustainable investing market with an array of names and approaches, it is important to assess the key features and match these with your own goals. A key hazard is ‘greenwashing’: where groups are talking up their green credentials in this space without the expertise or track record to back it up.

Here are five ways to tell whether funds, and the teams behind them, are capable of meeting your sustainable expectations:

1 Transparency

Genuinely sustainable fund managers should be transparent about how they invest, and open to being challenged on it. They should include clear and
simple information explaining how they run money: what companies they look for under the sustainable approach and what they avoid. This should not be generic greenwash, with little more than meaningless ‘brochure’ comments like “sustainability is in our DNA”. Anyone can write a report on climate change, for example, but how are funds positioned given the huge challenges that combatting this will entail?

2. Experience and resource

As in any walk of life, experience and depth of a team are important when it comes to sustainable investing. We have a 17-strong Sustainable Investment team and more than 21 years of experience running sustainable funds.

3  Knowledge and training

Sustainable investing is a specialist area and subjects like climate change are fast moving, so you will need to be confident that your fund managers have
the required knowledge to run money in this way. This can be anything from members of a team having specialist qualifications to a general focus on training to ensure people understand the latest sustainability trends.

4  Activism

Engagement is a key part of what we call sustainable investing. Managers
should be able to highlight a track record of holding companies to account and encouraging them to improve. They should be able to talk in detail about their engagement priorities – whether diversity, tax transparency or plastic pollution – rather than making sweeping statements. It is worth looking at managers’ AGM voting records: do they vote with company management or actually challenge the businesses in which they invest to improve?

5  Evidence

Are fund managers able to show how their views are reflected in their decisions: is it simply ESG data and reporting for the sake of it or making a genuine difference to investment?

Risk warning: Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

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