A Beginners Guide To Sustainable Investing

With the recent events of the pandemic and everything else that is going on in the world, it's now more important than ever to pick out sustainable investments.

But, how do you invest sustainably? That's exactly what we are going to cover inside of this article.

Alongside this, we're also going to give you a complete guide to what sustainable investing is, and how it works.

This guide covers:

What Is Sustainable Investing?

Three Pillars of Sustainable Investing Explained

The Best Indicators Of a Company's Future

How To Spot Profitable & Sustainable Investments

What Strategies Are There For Sustainable Investing?

Choosing Sustainable Investments

Final Thoughts

Sustainable Investing: Frequently Asked Questions

What Is Sustainable Investing?

Sustainable investing is an investment strategy that doesn't only look to generate profits, but also looks to non-financial criteria to pick out sustainable investments.

If this sounds quite broad, that's because it is.

The three pillars of sustainable investing are:

• Economic
• Environmental
• Social

All of these pillars contribute to how "sustainable" a company is which therefore decides whether it's a good investment. Using these pillars you can also often determine how a company will perform, as they play a great importance in the future of a company.

Usually, investors who want to invest sustainably look for companies that are actively making a positive impact.

Why Do Investors Look For Sustainability?

Sustainable investing has become increasingly popular with a range of investing communities. Plus, some major firms such as J.P. Morgan and UBS have already confirmed that they believe there will be a shift towards sustainable companies in the near future.

This could be a great reason to get in early on this trend and find some great sustainable investments.

And while we're sure that the motivations vary a little from investor to investor, the main two can be broken down into profits and ethics.

Profits - If an investor has a portfolio of companies that are doing really well, but there are issues in one of the three pillars, there is an additional risk involved. For example, a company that causes social or environmental issues could be affected heavily if the law changes damaging the investors' profits. Avoiding situations like these, in general, would mean additional profits in the long term which definitely is a motivation to invest sustainably. It's also a known strategy used for risk-management.

Ethics - Another big motivation to invest sustainably is ethics. When you are investing in companies that are not causing any economic, environmental, or social issues, you feel better about where your money is going. It would definitely be harder to sleep at night for a lot of investors if they are investing in companies that are causing ethical issues.

Many investors also believe that there is such a wide range of issues around the world that they can only be fixed if the capital stops flowing to companies that are creating them. Instead, it should flow to companies that are battling them to create a better world.

The Three Pillars of Sustainable Investing Explained

As we mentioned earlier in this article, there are three pillars of sustainable investing. These three pillars are economic, environmental, and social.

While every investor should define the criteria that they choose to use themselves, we have given you a general guideline below.

Economic -The economic pillar refers to investments that are supporting long-term economic growth, instead of just the growth of the company. So, not only should the company's growth benefit itself, but also the industry and economy as a whole. However, it should still be able to make positive profits itself.

Environmental -The second pillar of sustainable investing is the environmental pillar. If a company's actions are in some way damaging the environment, then it is not considered sustainable. In the future, there is likely going to be a law that could damage that company's profits.

Social -Last but not least, the third pillar of sustainable investing is social. If there are social issues with the actions of a company, then this also leaves a significant amount of risk for investors as future laws could damage the profits of the company.

With all of these pillars, you can also see where the ethical motivation comes from to avoid companies that don't fit these criteria.

Often, traditional investors overlook these three pillars and put too much weight on the financial side of things. This often then leads to additional risk which causes damage in profits.

If a company's profitability is dependant on a widely debated law not changing, then investing in it is a huge risk.

Additionally, for companies that are making a positive impact on one of these pillars, it will often give them additional support. As an investor, you also feel better investing in these companies. While there are endless examples of what a company could do to be considered sustainable, we just wanted to give you some examples below.

Science Company - If a science company is working on a vaccine for a virus or other type of illness, they can be considered sustainable, as they will benefit the future.

Water - If a company is working towards less water loss they would also be a sustainable investment.

Pollution - The same goes for companies that are combatting pollution, they would also be considered a sustainable investment.

Neglected Areas - Companies that are helping neglected areas within the world have a better future are also considered sustainable.

How To Spot Profitable & Sustainable Investments

Before you start investing in sustainable companies, you must define the pillars for yourself.

The word "sustainable" is very broad, and if ethics is a key motivation for you, then it is also very subjective. This is why you must define the pillars for yourself.

When it comes to picking out profitable and sustainable investments, the best approach is to diversify and go for smaller sized companies. The reason for this is that they have higher chances for explosive growth which makes them greater value investments.

Diversification is the key to sustainable investing because often, companies that are considered sustainable can also face more challenges. As Investors, we need to realise this and choose a range of small bets that have the potential for explosive growth.

Because we are diversifying with lots of companies that are sustainable, there is also very little risk.

The video at the start of the guide explains this in further detail.

What's The Difference Between Sustainable & Ethical Investing

While they may seem very similar at first, and in some investors' eyes they are the same, there are some stricter definitions too.

Ethical investing: This refers to actively avoiding companies or industries which impact society or the environment negatively. Ethical investors also choose to avoid tobacco, oil, gambling, and similar industries.

Sustainable Investing:  Sustainable investing is actively choosing companies that make a positive impact on the environment, economy, or society. Although, at first sight, it might seem like it is more restrictive than ethical, this isn't actually the case. When investing in sustainable investments you can invest in companies that are not all good or all bad such as oil companies that invest in clean energy.

Impact Investing: Last but not least, there is also impact investing. This is investing in companies whose impact can actively be measured. Some examples of this would include building schools, saving water, etc. -

Companies that fit the criteria for one of these types of investing, can also often cross-over into the other.

What Strategies Are There For Sustainable Investing?

While many investors have different strategies, one that is quite common is the ESG incorporation.

ESG stands for environmental, social, and governance.

It's a way to measure sustainability which is widely recognised by investors. Again, this concept is used to determine a company's long-term performance.

So, they are taking into account:

• How a Company is affecting theEnvironment (Pollution, climate change, etc.)
• How a company is affectingSociety (Employees, human rights, society in general, etc.)
• How a Company isgoverned and managed (Board structure, company ownership, etc.)

Using these principles is one of the strategies used to find profitable and sustainable companies to invest in.

Many also then like to break companies down into "avoid" or "advance" which is explained below.

Avoid - Any companies that hurt the ESG criteria should be avoided.

Advance - Companies that have a positive effect on the ESG criteria can advance, and can be invested in.

Things To Keep In Mind When Picking Out Sustainable Investments

Don't trust websites & scores blindly - Something that you'll come across is websites that score companies based on sustainability and ethics. While these can help find useful information about a company, you shouldn't trust them blindly. Often, they will say why they have scored them like they have which you can use as part of your research. However, the scores often only look at certain aspects such as whether they are fighting a global issue or something like that. One example of this would beCSRhub's 56 rating of Shell, despite them being asignificant polluter. 

After you define all of the factors for yourself, you can start researching sustainable companies and looking into their projects to decide whether you want to invest in them.

Diversification -Diversifying is crucial for endless reasons. One of the main ones being that despite how well we research, there could always be factors we don't even notice. These could affect our investments, so it's always best to diversify to minimise the chances of this. Additionally, when strategically diversifying into many smaller sustainable companies there is lots of potential for explosive growth, despite there being a small risk.

Strategy- If you want to invest in sustainable companies, it isn't just a case of picking out companies that are trying to make a better place, and leave it at that. You must also look for companies that can realistically dominate large parts of their industry. Otherwise, we probably wouldn't end up with great financial returns. While this may seem tricky at first, you must also remember that many of these companies will succeed because they are looking to make a positive impact. And, the more experienced you get with picking out these companies, the more likely you are to find them.

Prioritising - Something that can also often help when looking for sustainable investments is prioritising the concerns that you are most likely to avoid. This might be tobacco, selling arms, or anything of a similar nature. You can also do the same for industries that you would like to advance with. This will allow you to filter down to a couple of industries that you are more likely to invest in, which will make it much easier for you.

Final Thoughts

As you have seen throughout this article, sustainable investing is more than just a trend that investors are following for the sake of it. It's truly beneficial to invest sustainably, not only for ethical reasons but it also has some significant financial motivations.

There is a lower amount of risk involved and you are also putting your money towards companies that want to create a better world.

It's Not Too Late To Start

Throughout this article, we have discovered that sustainable investing is the future. 

There are still too many problems in the world that need solving which means that sustainable companies that solve them are likely to see explosive growth.If you would like to start investing in sustainable and profitable investments, you can contact us today and we'll see how we can help. 

Alternatively, you can also contact us using the info below.

Phone: 01926 969 010

Mobile: 07956 716 953

Email: Leamington@rockwealth.co.uk

Sustainable Investing: Frequently Asked Questions

Last but not least, we also wanted to cover some frequently asked questions around sustainable investing.

With the recent events of the coronavirus pandemic, clients of investment firms have become a lot more aware of sustainable investing. This has lead to positive ESG stocks seeing an increase in growth, and it's only looking to continue over the next years.

This alone has also started to turn into a financial motivation of why one might want to consider sustainable investing.Yes, there are. In fact, many registered investment companies which consist of ETFs, variable annuity funds, mutual funds, and closed-end funds use ESG criteria for their investment decisions.

According to the US SIF Foundation, there are 836 registered investment companies with ESG assets in 2020.  The same source also explains a huge spike in alternative and community investment funds in the last year.Performance is one of the main motivations to invest in sustainable companies, meaning they perform exceptionally well.

One example of this comes fromMorningStar, as they report that "26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts.” This was reported in the first half of 2020.

Various other larger financial firms including Deutsche Bank, Barclays, HSBC, Oxford University, Nuveen TIAA, and United Nations have found that sustainable investments perform as well, or even better than conventional investments.