How to invest sustainably
If you’d like to build wealth for the future while also doing your bit for the planet, you’re probably wondering where on Earth to put your money. Let’s take a look at how to invest sustainably and whether it’s worth the effort.
Capital at risk. Past performance is not a reliable indicator of future results.
What is a sustainable investment?
Sustainable investing means different things to different people. The terms ‘ethical investing’, ‘ESG investing’ and ‘impact investing’ refer to different investment strategies but are often used interchangeably. An ethical investor might actively avoid companies or industries that have a negative impact on people and the planet. For example, the tobacco industry and companies that test their products on animals are typically excluded.
Investments are considered ‘ESG’ if they address certain environmental, social and governance-related concerns. Companies can be given the ESG label even if an ethical investor would avoid them. For example, many ethical investors will avoid oil and gas companies, but an energy company might be considered ESG if they’re transitioning to green energy and divesting from fossil fuels.
An impact investor will usually prioritise businesses whose positive impact on people and the planet can be measured. They might expect a greater level of transparency and accountability than an ESG investor. This requires more expertise and can be more time-consuming as well as risky, as you’re putting all your eggs in one basket.
Is it possible to invest sustainably?
Yes, it’s easier than ever to invest sustainably, with more than 14,500 funds labelled ‘ESG’ as of August 2023. This means you can open a Stocks and Shares ISA, Stocks and Shares Lifetime ISA or a general investment account and start investing in an ESG fund in minutes if you want to.
If you want to be more ‘hands-on’ and only invest in companies you’re familiar with, you’ll need to do more research. After all, ethics are subjective. An investment that aligns with one person’s morals won’t necessarily align with your own. There may be companies that are considered ‘sustainable investments’ that you’d rather avoid.
Don’t put too much pressure on yourself to achieve perfection, particularly if you’re new to investing, your portfolio is relatively small, or you’re hoping to retire in the next 15-20 years or less. The sooner you start investing the better, as your money will have more time to grow.
You can expand your portfolio over time to cater to your personal beliefs. Chances are you’ll know more about sustainable investing in 5 years’ time than you do today.
To learn more, take a look at our guide on how to start investing.
Invest for your future with our Stocks & Shares Lifetime ISA
Invest up to £4,000 per tax year in a high-growth ESG fund – and receive a 25% government bonus to boost your first home deposit or retirement pot. Download our app and start by adding just £1.
When considering opening a LISA, remember that withdrawals for any purpose other than buying a first home or for retirement will incur a 25% government penalty, meaning you may get back less than you paid in.
Are sustainable investment funds worth the effort?
Most ESG funds are managed by professional fund managers, so you can start investing sustainably with very little effort. The fund manager will decide which companies to include, monitor their adherence to the fund’s criteria, and be responsible for the fund’s profitability. The means the barrier to entry for sustainable investing has never been lower, with many investment platforms and apps letting you buy ESG funds for as little as £1. All you need to do is find the right investment platform for you, open an account, and start investing in your chosen funds!
Some people may assume that sustainable investing isn’t as profitable as traditional investing, but this isn’t necessarily the case. In 2023, the performance of ESG funds and exchange-traded funds (ETFs) matched or surpassed that of traditional funds and ETFs.
As you gain experience and your investing knowledge grows, you can be more selective with your investments, potentially investing in individual companies that align closely with your beliefs.
Learn more: The best stocks and shares ISAs in the UK
Remember!
Investing in individual companies tends to be riskier than investing in professionally-managed funds. If you invest in a small selection of individual companies and one of them goes out of business, this can have a greater impact on your portfolio than if you’d invested in funds. Sustainable investment funds can offer greater diversification and help you reduce volatility.
Can sustainable investments save the world?
It’s impossible to know whether sustainable investing will save the world, but if you’re passionate about climate change it’s certainly worth a try! Investing sustainably is a great way to support companies that are committed to tackling issues such as climate change and inequality. As the demand for more sustainable investments has risen, companies around the world are looking for ways to reduce their carbon footprint and improve the lives of local communities so that they too can receive the ESG stamp of approval. The world of sustainable investing might not be perfect, but it’s a step in the right direction!
Get started with our Stocks & Shares Lifetime ISA
Invest up to £4,000 per tax year in a high-growth ESG fund – and receive a 25% government bonus to boost your first home deposit or retirement pot. Download our app and start by adding just £1.
