Sustainable investment funds pput your money into companies that both reward their investors and the planet. There isn’t much difference in the way a sustainable investment fund operates when compared to other types of more traditional funds; the key difference here is the types of company that make up the investment portfolio.
Any good financial adviser will tell you that sustainable investment is gaining greater public support – a report from BlackRock in 2020 showed that over 3 quarters of people want their investments to encourage positive impact. And it appears that people have been proactive with their investments, as investments into sustainable funds have increased rapidly in recent years.
So, what is sustainable investing?
When you look at the term ‘sustainability’ you could picture green fields laced with wind turbines and sprays of solar panels soaking up the sun’s glorious rays. But whilst green energy is a crucial component of a truly sustainable world, sustainable investing is about so much more than that. Most fund managers consider it by another term – ESG.
OK, what is ESG?
Environmental, Social and Governance (ESG). When a sustainable investment fund contemplates investing in a company, they will likely assess it based on multiple ESG factors. Depending on what their exact approaches are, they could consider any of the following questions.
Environmental – the company’s environmental impact:
- Does the company delivera net-positive carbon footprint?
- Do they efficiently use their water?
- Handling of waste management?
- What are their operating practices and subsequent ecological impacts?
- Is the company progressing to more sustainable production methods?
Social – the company’s impact on society:
- Are their employees treated fairly?
- Good health and safety record?
- Board of directors and senior management diversity?
- Commitment to workplace equality?
- Human rights record?
Governance – how the company is run:
- Transparencyof the company’s reporting practices?
- Are there any conflicting business interests of the board of directors?
- Has there been any serious corruptionallegations?
Finding out all of this information can be a great deal of work, so investment funds often hire teams of people dedicated to carrying out ESG research. They may also utilise external partners to gain and present this info for them. One of the largest firms is ‘Sustainalytics’, which continuously tracks and ranks the ESG performance in excess of 40,000 companies. That said, ESG is now considered so important that an entire infrastructure of business services have been built around it.
What is socially responsible investing (SRI)?
Investments that offer SRI products select their portfolio of investments after applying a strict filter to accommodate investors with certain political,religious or environmental preferences. For example, this couldplace itself in a fund that rejects non-Shariah compliant companies,oil companiesor weaponsmanufacturers. This type of investing is still focused on financial performance, with the exclusion of certain companies.
What is impact investing?
Impact investing is about investing capital in firms that intend to make the world a better place, either socially or environmentally. In example, a fund may only invest in companies that strive to improve life quality in Sub-Saharan Africa, or perhaps only invest in renewable energy companies. Impact investing still very much aims to grow your money, but places the cause at the forefront and financial gains sit behind this.
Choosing a sustainable investment fund
Global sustainable investments increased 34% to $30 trillion from 2016 to 2018, according to reports from the Global Sustainable Investment Alliance. That is a vast amount, but only $95 billion of this was invested into ESG funds in 2017, said Morningstar.
Whilst sustainable investing continues to gather popularity, you shouldthink about the following when choosing which fund is right for you.
- Type of financial product
- Type of sustainable investment fund
Your personal preferences will also impact the type of fund you’re considering:
- ESG funds: Suitable for those who want to see their money increase, whilst also offering support to companies that really take their environmental, social, and governance practices seriously.
- SRI funds: Suitable for those who want to see their money increase, but have certain, political,environmental or religious requirements.
- Impact funds: Suitable for those who want to use their money to push a cause i.e. renewable energy, and hope this can be done whilst also providing a financial return.
Regardless of the fund you choose, you may want to compare the performance of the options available to you. This information is available online but the data isn’t fully complete. If you cannot find an easy comparison, you could try comparing fund performance yourself by checking each fund’s own fact sheet.
Keep in mind that previous performances don’t provide any guarantees.
All sustainable investment funds carry fees to maintain your investments. It is a very competitive market, so you will find the amount they charge will differ between them. You might also find funds charge a wide range of fee types, which can prove more challenging to compare directly.
Fees might include:
- Initial charge
- Administration charge
- Performance fee
- Trading fees
- Ongoing charge or management fee
- Exit charge
You will want to think about the quality of the service provided by the investment fund. Ask yourself the following questions:
- Can I monitor investments via an online platform?
- How do existing customers rate the fund on online review sites?
- How easy is it to add money or withdraw?
- How easy is it to communicate with the fund if I have a query?