How to identify the ESG investment opportunities that are right for you
ESG (environmental, social and governance) investing is growing and it may be something you’re thinking about incorporating into your investment portfolio. But how do you know which opportunities are right for you?
According to Alternative Investment, global sustainable funds now have just under $2 trillion in assets under management. While still a relatively small portion of the investment market, it’s a sector that’s growing. Europe continues to dominate the space, accounting for 82% of assets under management, and there are more opportunities than ever. The first quarter of 2021 saw the launch of 169 new funds that have objective ESG criteria.
As the number of opportunities rises, it’s not surprising that more investors are considering if ESG can be part of their investment portfolio.
Two out of three investors keep ethical issues in mind when they make investment decisions, according to a This Is Money report. However, many investors admitted they don’t always understand the terms used to describe ESG investments. With terms like “SRI”, “impact investing” and “ethical screening”, it can be difficult to know where to start with ESG investing.
Do you want investments to focus on your values?
There are many reasons why you may want to explore ESG investments. This may include wanting your personal values to be reflected in the investments you make.
If you’re conscious about climate change, for example, you may want to avoid investing in fossil fuel companies. Or you may want to invest in companies that pay the living wage across their supply chain. The good news is that with more ESG funds and companies increasingly considering sustainability, you have many opportunities open to you.
One of the challenges of investing with your values in mind is that what’s important to you may be very different to others. It’s a highly subjective area and, as a result, even some investment opportunities that are labelled “sustainable” or “responsible” may not match your criteria. It’s important to clearly set out what your priorities are and reflect these in the choices you make; what impact do you want your investments to have?
Even with your values set out, it can be difficult to find investment opportunities that match your criteria exactly. There may be points that you need to compromise on. However, if you’re interested in ESG investing we can help you find opportunities that match your goals.
Keeping your investment strategy in mind
While ESG investing is often about your money driving positive change in some way, the financial returns are still important.
According to the This Is Money report, just 15% of investors believe that incorporating ESG criteria will reduce their potential gains. While ESG investing doesn’t automatically mean your returns will be lower, all investments do come with risk. It’s just as important to ensure your choices align with your investment strategy as it is when you don’t consider ESG.
If you’re thinking about investing in ESG opportunities, here are two questions to consider alongside your values.
1. What are your personal goals?
You may have already set out what impact you want your investments to have in terms of ESG, but why are you investing?
Your goals will affect your investment strategy. Investing for a retirement that is 20 years away will have a very different investment strategy if you’re investing for your child’s education. The timeframe of your goal matters. Generally, the longer you plan to invest, the more risk you can afford to take. However, the goal will also affect how comfortable you are taking the risk.
2. Do the investments reflect your risk profile?
All investments come with some level of risk. Your risk profile is influenced by many factors, including your goals, the other assets you hold, and your capacity for loss. You should always consider what an appropriate level of risk for you is when weighing up investment opportunities.
It’s also important to build a diversified portfolio. This means spreading your investments across different sectors, geographical locations, and assets. This means that if one particular area of investment falls in value, other investments can help to offset this. So, while you may want to support renewable energy, placing all your money into this sector is unwise. Instead, it should form part of a balanced portfolio.
When making ESG investments, it can add a layer of complexity. You still need to consider the usual investment steps, as well as understanding what your ESG criteria is. If it’s something you’d like to explore, please contact us. We can help you build an investment portfolio that reflects your values while helping you stay on track to achieve personal goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.