Going green?—?evaluating your next investment opportunity

Investing in sustainability with a conscience is not just for the green-minded anymore. It may seem difficult at first, but there really isn’t anything too complicated about establishing yourself as either an ethical investor. So, as the range of investment options categorised as ‘socially responsible’ continues to grow, investors would be well advised to follow some simple steps to establish their environmental credentials.

Green or greenwashed?

The latest data from the UK Investment Association shows that two out of every three pounds invested in retail funds in September went into responsible investment funds. The potential for further growth is highlighted by the fact that such funds only represent 5.5% of total funds under management.

A recent survey of financial advisers by the Association of Investment Companies (AIC) ?found that 89% expected demand for ESG investments to increase over the next 12 months.?

Don’t assume anything

It's not always clear what makes an investment sustainable. This can be a challenge for both the advisor and their clients, but it doesn't have to remain so. Advisors surveyed by AIC admitted that they were uncertain about ESG terminology while even those who described themselves as knowledgeable had some difficulty understanding how metrics might measure funds' sustainability credentials.

Ask difficult questions

If you decide to invest without the assistance of a financial adviser, the first stage in establishing the environmental credentials of an investment opportunity is to look at where the fund invests and the fund managers’ voting policies. One of the best sources of such information is Fund EcoMarket.

Getting ‘under the hood’ of ESG funds is critical as some funds marketed as sustainable are not as sustainable as they appear to be cautions UKSIF chief executive, James Alexander. The FCA is increasingly looking at this area through its proposed sustainable investing labelling regime.?

Compromise isn’t necessary

The idea that investors have to accept lower returns when only making investments that align with their environmental principles has been debunked. In fact, there is a case to be made for the view that overlooking environmental considerations would be more likely to prove costly to investors.

According to Alexander, various studies have shown that companies which take into account - and address - ESG issues will actually create greater value in the long run while those investments not aligning with environmental principles are likely to deliver lower returns as policymakers reform subsidies and regulations impacting these companies (creating issues with ‘stranded assets’ as a result of policy interventions).

ACTION POINTS:

• Take time to investigate the policies and objectives of ESG investment opportunities?
• Work out what you want your investment to ‘do’ in terms of environmental or social impact
• Don’t accept any suggestion that responsible investing means compromising on returns
• Watch out for new regulations designed to help investors make more informed decisions