What exactly is ESG and sustainable investing?

More people are coming around to the idea of being a responsible investor. But what does this actually mean for you and your financial plans?

Here’s a few ‘back-to-basics’ tips to demystify the world of ESG (environmental, social, and governance factors) and sustainable investing.

It’s not a world away from regular financial planning

In practice, there are many similarities between an ESG approach like ours and what could be described as ‘traditional’ financial advice. Both approaches revolve around finding a plan that meets your investment needs.

So then, what’s the difference?

Well, the best financial advice comes from getting to know the investor behind the investment. Beyond your financial objective, such as saving for retirement or putting your child through education, what are you wider life goals? For us, asking questions about your sustainability priorities is an extension of how we get to know you. 

Everybody approaches ESG differently, some simply want to protect their investments against the future negative impacts of something like climate change. Others want their capital to play a more active role, such as targeting companies that are helping make a positive difference – such as those finding ways to tackle pollution, or leading lights on issues such as human rights.

Whatever your position, knowing more about which ESG issues matter the most to you, enables us to develop a broader picture of what you want from your investments. and helps us find you the ideal portfolio to match your objectives.

It doesn’t mean compromising on returns

Sustainability is no longer a compromise. There’s not an either/or between responsible investing and growing your savings. 

Research has shown ESG-based investments can match the performance of funds with a wider focus. And in fact, companies that have good governance structures and are more forward-thinking on issues like the environment, diversity, and human rights, are more likely to perform better in the long run.

The way we see it, taking a closer look at ESG factors enhances your investment portfolio. You’d expect a fund manager to look at financial factors, such as whether a company can keep paying a dividend or has too much debt. The additional focus on ESG gives a more holistic view and helps them construct a portfolio which is even more resilient to an uncertain future. 

It’s not a niche concern

Think that ESG investing is just about buying up quirky ‘green’ investments? Think again.

What might surprise you about many of the investments that feature in our model portfolios is how mainstream they are. They include companies which have the potential to grow on the back of major shifts such as the global transition towards cleaner energy sources, societal changes, or improving corporate governance. 

This means companies like National Grid, the world’s largest publicly listed utility, which could gain from the huge growth in electric vehicles expected over the next few years. Meanwhile, National Express, the public transport company is also a potential strong ESG contender. Its chief executive Ignacio Garat has said he believes the firm has a critical role in reducing pollution and enhancing social mobility.

It’s not always simple – so ask the experts

All this is not to suggest that taking an ESG approach is easily done. There are compromising elements involved. For example, the batteries powering electric vehicles – a lynchpin of the sustainable revolution – can also raise other issues for companies, not only because of the environmental costs associated with mining (in particular methane emissions), but also ethical concerns around some of the producer countries.

The process of assessing ESG credentials can be complex, and that’s why it’s best to go for specialist advice. At Better World Financial Planning, all of the investment managers providing our model portfolios have built strong track records. Each of them has its own criteria for assessing sustainable investments, but they are unified by investment products which meet responsible, positive impact-driven, sustainable, and environmental criteria, along with a strong focus on good corporate governance.

It’s a great way to make positive change

It’s your money, and if you’ve made the decision to invest, we believe it’s worth doing this in a way where you can make a constructive impact on the world around you. 

Ultimately, our ESG approach is about making small positive steps, which in the end can make a big difference.