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ESG investing aims to protect and grow investors' money, while at the same time having a positive social or environmental impact. Here’s what you need to know.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
The world today isn’t short of challenges. From global warming to an increasing and ageing global population – humanity has its work cut out to create solutions to the many complex problems of the 21st century.
And rather than something to be solved by charities and NGOs, or government regulations, it’s become clear that sustainability is everyone’s responsibility. So it’s no surprise that investors increasingly want their investments to support these goals.
Responsible investing isn’t new – it’s been around for centuries – as people have always invested in what they approve of and avoided what they won’t support. One approach to this is ‘negative screening’, and the managers of many traditional ethical funds use this technique today, often excluding putting money into things like oil companies, the tobacco industry or arms manufacturers.
Investors though have often felt that their principles came at the expense of their pocket, as they missed out on key areas of returns.
While in the past investing with principles suggested lower returns, many argue that investing in a sustainable way could in fact see better returns than investing which only looked for financial gains. After all a business which evaluates the long-term needs of the world at large, values and invests in its employees, and makes sure it’s being well run, will often have the potential for providing sustainable earnings growth as well as sustaining people and the environment.
However, whilst there is some evidence that the risk-adjusted returns of sustainable investment strategies can outperform traditional strategies, because this is a relatively young area we cannot draw any concrete conclusions about its expected returns. This type of investment, just like all others, can fall in value as well as rise.
ESG investing is traditional investing combined with philanthropic aims. New options emerge where the aims of generating a financial return and creating societal impact overlap.
As the challenges of global sustainability have come into focus – so too have the ways in which investing can support these. Many fund managers have come to consider the effect their investments have on the environment and society, and the governance structures companies have in place to make sure they’re achieving their investment goals in the right way.
We’ve selected a number of ESG funds we like and included them on our Funds List.