Investing in a changing world

27 April 2018

Have you considered how your investments will influence the world around you?

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.

What you’ll learn:

  • How your investments can influence the world around you.
  • What options you have.
  • Why investors are considering impact investing.

Thinking about the future

When investing into your ISA this year, you are likely imagining the lifestyle benefits that may come from growing your investments over time. It is also important to think about long-term lifestyle changes like retirement, and whether you are saving and investing enough for them.

But have you considered how your investments will influence, or could be influenced by the world around you? Climate change is one such theme with the potential to have far-reaching consequences on industries and investments. In the US, major hurricanes Harvey and Irma were the most high profile of a string of natural disasters last year. These floods, fires, and hurricanes resulted in 2017 being the costliest year on record for natural disasters, with a price tag estimated to be at least $306 billion.1

What if your investments themselves are contributing in part to climate change? What can you do?

Integrating these considerations into your portfolio

Traditionally, we have focused on maximising the financial returns of your investments without considering the impact our investments have. This is how investing has been done, and most investments take this approach. But if you do care, what options do you have?

Ethical investing has been the typical alternative for investors wanting their investments to reflect their personal beliefs. This approach excludes sectors or companies deemed “unethical”, such as weapons, gambling and animal testing. Where you feel strongly about a set of issues, and can find a fund matching these, ethical investing will ensure your money does not enable those causes.

But clearly there’s a question – who determines whether something is ethical? Two ethically labelled funds may have very different screening processes in place, so it is important to understand what is and isn’t excluded. Moreover, ethical funds will typically have pre-defined criteria for excluding sectors or stocks (historically, strong performers like tobacco), so you should be comfortable with the implications of excluding certain sectors and any investment returns they could have generated.

More recently, impact investing has been coming into the mainstream as an approach that considers the impact on society of the investment as part of the investment process. Potential investments are assessed both in terms of how the company operates and the goods and services the company provides. Impact investing is intentional about the positive contribution it seeks to make, without being as absolute as ethical investing about what can or can’t be included in a portfolio.

ISA investing is for the long term, and so is impact investing

Impact investing funds tend to focus on long-term themes – climate change, demographic changes, and resource constraints to name a few. Solving these big challenges is important, but also potentially financially rewarding. Investing in companies that are contributing to positive environmental or social change may support the development of a sustainable global economy. One would expect this to bring financial benefits to these companies, and therefore to their investors. Similarly, this can put pressure on those that do not consider these long term trends, or at worst, contribute to them. Research has shown that companies with better environmental, social and governance standards show higher profitability, higher dividend yields and lower volatility.2

Within impact investing, there are various approaches to implementing impact considerations. One way is to invest in companies that are pursuing sustainability aims, for example in water management and energy efficiency. Another way is to invest in companies that are addressing society’s challenges that deliver specific outcomes, such as developing innovative new technologies to harness new sources of energy.

Using an impact investing strategy allows an investor to focus on producing financial value whilst incorporating their particular social and environmental concerns. Your investments have an influence on our world – in this new tax year use your ISA to think of the influence you would like them to have in the long term.

Please bear in mind that no matter what stance you take towards investing, investments can still fall in value and you may get back less than you invest. Barclays Smart Investor doesn’t offer personal investment advice; if you’re unsure, seek independent advice.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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