Investing in a way that reflects your values sounds straightforward. However, ESG factors aren’t always black and white. There may be grey areas where you’re unsure if an investment opportunity aligns with your goals or you may need to compromise.
ESG investing involves considering information across three broad categories – environmental, social, and governance – alongside financial data when making investment decisions. As a result, investors may align their decisions with personal ethics and goals.
However, there isn’t a single definition of what a “sustainable” or “ethical” investment is.
Investors may have very different views on whether a company or industry has a place in an ESG portfolio. For example, think about these scenarios and whether you’d consider them to align with your ESG goals:
- A company is operating in the fossil fuel industry, which some investors would exclude automatically. However, the firm is investing in renewable energy and carbon capture and storage technology, which could support efforts to reduce carbon emissions in the long term.
- A technology company is developing healthcare devices that would support people living with long-term disabilities. Yet, its operations are highly energy-intensive, so its carbon emissions are high.
As you can see, whether an investment aligns with ESG principles isn’t always black and white. Your personal values will influence how you see these opportunities and others like them.
So, how can you navigate these grey areas when deciding how to invest your money?
Set ESG investment boundaries
Start by thinking about what ESG means to you and which areas you believe are most important. What are the areas you do not want to invest in under any circumstances, and where would you be willing to compromise?
Having boundaries set could provide you with some guidance when you’re reviewing opportunities. For example, if climate change is a major concern for you, you might opt for investments that exclude the fossil fuel industry while actively looking for opportunities to invest in renewable energy firms that align with your financial goals.
Recognise that ESG investing isn’t an all-or-nothing approach
Every investment doesn’t need to perfectly align with your ESG values. Indeed, if this is your goal, you could find your options are very limited.
There are several ways you might find a balance within your investment portfolio, including these three.
1. Setting a tolerance for activities that don’t align with your ESG values
Modern companies are often complex, potentially covering multiple sectors, subsidiaries, and a wide supply chain. Having a tolerance for non-ESG activities could give you greater flexibility.
This is an approach that some ESG funds take. For example, they may state that a company cannot derive more than 10% of its revenue from activities linked to the fossil fuel sector rather than avoiding every firm with connections to the industry.
2. Taking a best-in-class approach
Rather than excluding industries, this approach involves selecting companies that perform well against ESG criteria compared to their peers.
While investments might not align perfectly with your values, it means you’re investing in the companies that are leading the way without excluding entire sectors from your investment portfolio.
3. Allocating part of your investment portfolio
You might choose to incorporate ESG values into a portion of your investment portfolio. So, you could allocate 20% of your investable assets to investments with specific ESG objectives, while using other investments to focus on diversification, growth, or income.
Don’t forget about your financial goals
Remember, even when you’re considering ESG factors, your financial goals are still important when investing. Allowing your ESG preferences to override your financial plan could mean you take too much risk or miss opportunities to reach your financial goals.
As with other investment decisions, you should consider your investment time frame, what level of investment risk is appropriate for you, and how an investment fits into your overall portfolio.
Get in touch
If you have any questions about making ESG considerations part of your investment decisions, please get in touch. We could help you assess how you might invest in a way that aligns with your values and financial goals.
Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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